A closely monitored section of the U.S. Treasury yield curve (Spread between 2Y & 10Y) inverted on Tuesday for the first time since September 2019, a reflection of market concerns that the Federal Reserve could tip the economy into recession as it battles soaring inflation.
The 10-2 Treasury Yield Spread is the difference between the 10-year treasury rate and the 2-year treasury rate. A 10-2 treasury spread that approaches 0 signifies a "flattening" yield curve. A negative 10-2 yield spread has historically been viewed as a precursor to a recessionary period.
Investors are now concerned that the Federal Reserve will aggressively hike rates to fight soaring inflation, with price pressures rising at the fastest pace in 40 years.
However, the lag from an inversion of the 2-10 year part of the curve to a recession is typically relatively long, meaning that an economic downturn is not necessarily a concern right now. The time delay between an inversion and a recession tends to be anywhere between 6 and 24 months.
Nevertheless, the recent stock market rebound could be a bear trap and I am reducing my position in the stock market.
Quick insights on what is a yield curve
Track the 10Y-2Y Treasury Spread here