Flattening US yield curve signals higher recession risk, but no alarm yet
TLT•The US Treasury yield curve’s 10-year/2-year spread has narrowed to 40 basis points, implying a 31% chance of recession within 24 months, compared with 12% at its long-run average. Macro Hive chief US economist Dominique Dwor-Frecaut said the warning is not evidence a downturn is imminent.
1. Recession risk signal
The spread between 10-year and 2-year Treasury yields has compressed to 40 basis points, below its 50-year average of about 85 basis points. Based on September’s average spread, that implies a 31% recession probability within 24 months; the odds are 12% at the long-run average and 50% when the curve is roughly flat or slightly inverted.
2. Mixed economic indicators
Profit growth and new orders remain strong, and jobless claims are low, while building permits are slowing. The yield curve has historically predicted recessions 12 to 24 months ahead, but gave a false signal in 2022-24, when the economy avoided a downturn.
3. Rate outlook
Markets are pricing in three rate hikes by the end of 2027, compared with one in the Fed’s median projection. Dwor-Frecaut expects one more hike in 2026 followed by a hold through 2027, and warned that markets could interpret each hike as signaling a steeper path than the Fed intends.
