What's The US Yield Curve Signaling?

In recent weeks, the difference in yields between 10-year and 2-year U.S. Treasuries has hit post financial crisis lows, as evident in the chart below. Declining long-term yields have primarily driven this drop, as expectations for a near-term Federal Reserve (Fed) rate increase have plummeted amid poor May U.S. jobs growth and Brexit worries.

This difference in yields, otherwise known as the "2s10s" spread or curve, historically has been viewed as a barometer of the economic outlook. A flattening curve, like the one we're witnessing today, that moves toward an inverted curve (i.e., where 2-year yields are greater than 10-year yields) traditionally has been seen as a sign of a pending U.S. recession.
The flattening yield curve today, however, shouldn't necessarily be interpreted as a sign that a U.S. recession is ahead. Here's why.
Different factors are behind the shape of today's yield curve
Worries about the economy are traditionally what drive curves from flattening to inverted. When investors become worried, they tend to shift their money out of cash or short-term Treasuries and buy longer-term Treasuries, pushing 10-year yields down and short-term yields up. Economic worries are certainly still playing a role in flattening the curve, this time around. Case in point: The recent drop in Treasury bond yields after the U.K.'s surprise vote to exit the European Union. However, the global economic recovery has languished for years,... Read more