Bond Market Signals Economic Warning as Yield Curve Flattens to Historic Low

The US bond market is sending out warning signals about the economy's health. A closely watched indicator, known as the flattening of the curve, has dropped to its lowest point since early 2025, with the extra yield investors demand to hold 10-year Treasuries over two-year notes shrinking to just 17 basis points last week.

This phenomenon could be a sign that the US Federal Reserve's interest rate hikes are starting to have an impact on the economy. An inverted curve has historically preceded each of the last eight recessions, although its predictive power proved faulty earlier this decade.

Investors are bracing for the possibility of a recession as the Fed raised rates this September for the first time in three years and indicated additional hikes are likely. Zach Griffiths, head of investment-grade and macro strategy at research firm CreditSights, said, 'Seeing the two- and 10-year curve invert or flatten dramatically calls into question the idea that the economy is very strong.'

Others disagree, however, with some analysts predicting a steeper curve in the coming weeks. Ed Al-Hussainy, a portfolio manager at Columbia Threadneedle, said he is positioning for an inversion of the two- to 10-year and five- to 30-year curve over the next six months.