The 2 and 10-year Treasury Spread: Why this is an important economic indicator

Investing relies on predicating future trends and U.S. treasury rates remain a popular indicator. The 10-Year U.S. Treasury can be used as a proxy for mortgage rates and consumer confidence. This rate compared to a lower term rate such as the 2-Year Treasury Rate is an important barometer of the economy. When analyzing the spread between the 10-Year and 2-Year rates, the data is plotted on a graph and the changes in shape can tell a broader story.

When the market foresees stronger growth, higher inflation or interest rate increases by the Federal Reserve, the shape of the curve steepens, meaning the yield on the 10-year is better than the 2-year. On the other hand, when investors are expecting weaker growth, lower inflation or an easier Fed policy, the yield spread narrows, and the 2 year becomes the higher yield. If the curve goes below zero, becoming inverted, the 2-year having a higher yield than the 10-year, is a potentially recessionary signal. An inverted treasury yield curve has preceded the past eight recessions while throwing out two false positives with an inversion in late 1966 and a very flat curve in late 1998. When comparing lower term bonds such as a 3 month or 6 month yield to the 10 year yield, the results follow a similar pattern. Many believe that comparing the 3 and 6 month yield to the 10 year yield is a better indicator today of where we are headed than the 2 and 10 year yield but it’s worth keeping an eye on all three.

2 and 10 Year Spread