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The Flattening Yield Curve Just Produced Its First Inversions

Historically, inversions have been an early warning sign of recession, but analysts warn about reading too much into today’s news.

By Katherine Greifeld | December 03, 2018 at 09:20 PM

A section of the U.S. Treasuries yield curve just inverted for the first time in more than a decade.

The spread between 3- and 5-year yields fell to negative 1.4 basis points Monday, dropping below zero for the first time since 2007, and the 2- to 5-year gap soon followed. The 2- to 10-year is more closely watched as a potential indicator of pending recessions. But Monday’s move could be the first signal that the market is putting the Federal Reserve on notice that the end of its tightening cycle is approaching.

Some analysts attributed the short-end underperformance to demand for riskier assets as global trade tensions eased following this weekend’s tariff truce between U.S. President Donald Trump and China’s Xi Jinping. Others pinned it to modestly higher expectations for Fed hikes next year after the summit between the two leaders. Either way, the five-year is faring better because investors anticipate the end of the central bank’s hiking path beyond next year.

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