How the 10Y-2Y Treasury Spread Predicts Recessions
The yield curve spread measures the difference between long-term and short-term US Treasury yields, most commonly calculated as the 10-Year Treasury yield minus the 2-Year Treasury yield. This spread has inverted before every US recession since 1970.
Three states: Normal (positive spread, growth expectations), Inverted (negative spread, recession warning), Flat (transition state). The 2022-2023 inversion reached approximately -108 basis points in July 2023.
Re-steepening after inversion often signals that recession is imminent or underway, as the Fed begins cutting rates.