The bond market yield curve is returning to normal after an inverted state that raised recession fears

The ratio between the 10-year and 2-year U.S. Treasury yields briefly normalized on Wednesday, reversing a classic recession indicator.

Following economic news showing a sharp drop in job openings and dove-like comments from Atlanta Fed President Raphael Bostic, the benchmark The 10-year interest rate was slightly above the 2-year interest rate for the first time since June 2022.

The respective yields were both around 3.79% during the session, with only a few thousandths of a percentage point difference.

An inverted yield curve, where shorter-duration yields are higher, has signaled most recessions since World War II. The reason shorter-duration yields have risen above their longer-duration counterparts is essentially the result of traders pricing in slower growth in the future.

However, a normalization of the curve does not necessarily mean good times are ahead. In fact, the curve usually reverses before a recession hits, meaning the U.S. could still be in dire economic waters.

“If you don't have a historical understanding of the economy, then of course it's positive,” said Quincy Krosby, chief global strategist at LPL Financial. “But statistically speaking, if the economy actually goes into a recession or is in a recession, the yield curve will normalize simply because the Fed is going to cut rates” in response to a slowing economy.

The price action followed a Labor Department report showing that job openings unexpectedly fell below 7.7 million in July, putting supply and demand in near sync after a severe imbalance since the Covid crisis. Job openings at one point outpaced labor supply by more than 2 to 1, exacerbating inflation that was at its highest level in more than 40 years.

At the same time, Atlanta Federal Reserve President Raphael Bostic commented, around the same time as job openings fell, signaling his willingness to cut rates even as inflation rises above the central bank’s 2% target.

Lower interest rates are seen as a boost to economic growth. The Fed has kept its benchmark interest rate at a 23-year high since July 2023, with a target rate of 5.25%-5.5%.

While the market is paying the closest attention to the relationship between the 2-year and 10-year, the Fed is paying closer attention to the relationship between the 3-month and 10-year. That part of the curve is still steeply inverted, with a difference of more than 1.3 percentage points.