One of Wall Street’s favorite recession predictors—an inverted yield curve—is getting less inverted, but that isn’t all good news for investors. How the curve un-inverts matters, too.
But over the past 15 months, investors have been pricing in higher interest rates and economic risk in the near term, lifting yields on the short end of the curve above the long end. That dynamic has historically been a reliable recession indicator—an inverted yield curve has preceded every U.S. recession since the 1950s.
It matters how the yield curve un-inverts. That can happen in two ways, after all—either the 2-year yield falls more quickly than the 10-year yield, or the 10-year yield rises faster than the 2-year yield. Either pattern results in a steeper yield curve. The former dynamic is called a bull steepener, while the latter is more ominously named a bear steepener.