The 2s10s spread has spent most of the last year oscillating around zero, which is exactly the environment where the yield curve stops being a clean signal and starts being a Rorschach test.
The two competing readings
Reading one: soft landing, priced correctly. Under this view, the curve normalized because growth and inflation both cooled without a recession, so the term premium investors demand for holding longer-dated debt is simply returning to a more typical level.
Reading two: recession delayed, not avoided. Under this view, the un-inversion reflects markets pulling forward rate-cut expectations, and the curve will re-invert or steepen sharply the moment labor data disappoints.
Both readings are consistent with the same data. That is the problem with using the curve as a single-variable indicator this cycle.
What would distinguish the two stories
- Whether steepening is driven by the short end falling (rate-cut expectations) or the long end rising (term premium, fiscal supply)
- Credit spreads, which have stayed historically tight through the entire episode
- The behavior of real yields specifically, rather than nominal yields
A steepening curve driven by falling short rates and a steepening curve driven by rising long rates look identical on a single chart and mean almost opposite things for growth.
Our working view
We're not treating the curve as a standalone recession signal this cycle. It's more useful as a confirming indicator alongside credit spreads and real yields than as a leading one on its own. The next data point worth watching closely is whether the steepening continues if the short end starts to compress after the next rate decision.
We'll revisit this once the next Federal Reserve meeting outcome is known.