Investors are worrying about the fact that 10-year US Treasury yields have fallen relative to two-year ones – and, on a few days recently, have dropped below them. They are partly right to be concerned, and partly not.
They are right because the yield curve predicts recessions; when longer-dated yields are below shorter-dated ones, a recession follows. Back in 2007 Glenn Rudebusch and John Williams (who now helps set interest rates as a member of the Federal Open Market Committee) showed that the curve was a much better predictor of recessions than professional forecasters. Subsequent events have vindicated them. A few months after they wrote the US fell into a deep recession which economists had mostly not expected even though the yield curve had been inverted months before. And in 2019 the yield curve inverted again – and recession ensued.