How the U.S. Bond Market Is Giving a Key Clue About the Next Recession

The U.S. bond market may have given one of its most definitive indications yet Tuesday that America's economy could be headed for or has already entered a recession.

On the closely watched Treasury yield curve, the two-year and 10-year Treasury yields inverted at one point Tuesday afternoon, meaning that the 10-year yield was, at least temporarily, lower than the two-year. The 10-year yield is typically higher than the two-year, but CNBC reported that the two measures were 2.789 percent and 2.792 percent, respectively.

The inversion of the two could signal that the U.S. economy is getting weaker and possibly headed for a recession, since previous recessions have been preceded by such a reversal, according to an explainer compiled by the World Economic Forum.

With inflation hitting a 40-year high in May and Americans facing surging prices for gas, food and other items, concerns of a U.S. recession have been on the rise in recent weeks. Experts have warned that the U.S. is headed for the significant decline in economic activity that characterizes a recession, and some have even said that the U.S. is already in one.

Last month, the Federal Reserve announced its largest interest rate hike in 28 years in an effort to offset the inflation surge. But the move has also gotten experts talking about an increased likelihood for the U.S. to enter a recession as a result.

U.S. Recession Indicator
The U.S. bond market may have given one of its most definitive indications yet Tuesday that America’s economy could be headed for or has already entered a recession. Above, U.S. $100 notes are photographed in Buenos Aires, on June 23, 2022. Luis Robayo/AFP via Getty Images

As explained by the financial media website Investopedia, a bond, in simple terms, is like an IOU. Referred to as fixed-income instruments, they signify loans made from investors to borrowers, which can range from companies to governments. A bond yield is the "return an investor realizes on a bond," according to the website.

A yield curve, such as the Treasury's, can provide a visual representation of how much of a return investors can expect to receive for bonds that mature at different times. An inversion of a yield curve is "unusual" because it "reflects bond investors' expectations for a decline in longer-term interest rates, typically associated with recessions," according to Investopedia.

CNBC's report did not specify the exact time of the inversion on Tuesday, but at about 4:30 p.m., the two measures appeared to have switched back to normal, though not by a large margin. The 10-year yield was 2.829 percent and the two-year yield was 2.827 percent at the time, according to spreads run by CNBC for both the longer and shorter duration yields.

The two yields also inverted in late March this year, CNBC reported.

Newsweek has reached out to the U.S. Treasury for comment.