Treasury Yields Invert as Investors Weigh Risk of Recession | U.S. Bank (2025)

For more than a year now the fixed income market has been in the grips of an uncommon dynamic known as an inverted yield curve, which some consider a harbinger of recession.

A simple way to view the yield curve is to look at current interest rates, or yields, on U.S. Treasury securities with maturities of three months, two years, five years, 10 years and 30 years. Investors typically demand higher yields when they invest their money for longer periods of time. This is referred to as a normal yield curve, one where yields rise along the curve as bond maturities lengthen. The chart below depicts a normal, upward sloping yield curve among these U.S. Treasury securities of varying maturities, depicting actual yields in the Treasury market at the end of 2021. At that time, the yield on 3-month Treasury bills stood at 0.05% and moved progressively higher as maturities extended along the yield curve, up to a yield of 1.90% on 30-year Treasury bonds.

Source: U.S. Department of the Treasury.

However, at rare times, the yield curve “inverts.” The use of this term does not necessarily indicate that the slope moves consistently higher to lower across the yield spectrum when reading the chart from left to right. But it can mean that yields on some shorter-term securities are higher than those for some longer-term securities.

In late October 2022, the yield on the very short-term 3-month Treasury bill moved above that of the 10-year Treasury note. The inversion became more pronounced toward the end of 2022 and the spread widened in 2023.

Source: U.S. Department of the Treasury.

The inversion today is not as steep as it was earlier in 2023. As of November 21, 2023, the yield on the 3-month Treasury bill was 5.54%. By comparison, the yield was 4.42% for the 10-year U.S. Treasury note, a 1.12% spread. The inversion was most pronounced in early May 2023, when yields on 10-year Treasury notes were 1.89% lower than what investors were paid on 3-month Treasury bills.¹ Notably, the yield on the 10-year Treasury note rose from a level of less than 4% at the end of July to nearly 5% in mid-October before dropping again in November.

The current inversion began in 2022, in large part due to the actions of the Federal Reserve. When inflation emerged as a major issue in 2021 and 2022, the Fed, in conjunction with one of its mandates to maintain price stability, significantly increased the short-term federal funds target rate it controls. This is one of the tools the Fed uses to try to influence the economy. The fed funds rate, which was near 0% in early 2022, has been increased since 11 times, to a range of 5.00% to 5.25%. Yields on shorter-term securities followed suit. While longer-term bond yields also moved higher, they didn’t rise as dramatically as shorter-term instruments.

Assessing the recession risk

Some market analysts believe that an inverted yield curve signals the potential of a pending economic recession. However, Rob Haworth, senior investment strategy director at U.S. Bank Wealth Management, points out that the reliability of the inverted yield curve as a recession signal is somewhat questionable. “We only have data going back less than 50 years, so the causality connection may not be infallible.”

However, Haworth notes that the current interest rate environment creates headwinds for business investment. “It represents a steeper cost for corporations. With short-term rates so high, companies could become increasingly reluctant to borrow, as it is more challenging to realize a payoff when investing the borrowed capital in new equipment and facilities or added employees.” At the same time, Haworth points out “many corporations are not yet showing signs of distress when it comes to their debt load and continue to maintain strong balance sheets,” says Haworth.

Matt Schoeppner, senior economist at U.S. Bank, says there are reasons to watch economic trends closely. “Banks tend to start pulling back from lending in this type of environment, and higher interest rates also dampen consumer borrowing.” Schoeppner adds that while these factors are potential harbingers of an economic downturn, it’s not yet a foregone conclusion. “While bank lending has tightened, it’s not clear that it’s happening at a pace that is indicative of a recession,” says Schoeppner. U.S. Bank’s forecast calls for the economy to slow, but maintain a modestly positive pace of economic growth in the coming months.

Haworth believes key signals about future economic strength will come down to whether labor market trends reverse, and unemployment rises. Recent data shows the unemployment rate remains below 4%, however, still lingering near a half-century low.² To this point, steady consumer spending, buoyed by the strength of the labor market, has helped keep the economy on a growth trajectory. “Even if consumers have spent down savings and are taking on more debt, wage gains have been sufficient in this strong labor market to allow consumers to spend sufficiently to keep the economy on a positive path,” says Haworth.

Investment considerations in today’s unusual environment

For much of 2023, investors were drawn to short-term bonds that offered more competitive yields compared to other types of cash-equivalent investments. However, Haworth recommends investors also consider longer-term bonds, with yields that are far more attractive today than they were at the start of 2022. “Investors who have been keeping money out of long-term bonds may want to position assets back toward a more normal allocation into that end of the market,” says Haworth.

One consideration for bond investors is the risk of rising interest rates. When interest rates rise, values of bonds held in an existing portfolio lose market value. “A 30-year bond is much more sensitive to interest rate movements than a 6-month bond,” says Eric Freedman, chief investment officer at U.S. Bank Wealth Management. Yet Freedman believes attractive interest rates create opportunities for investors. “It may be a time for fixed income investors to spread out exposures across the maturity spectrum,” according to Freedman. “It’s also a time to emphasize high credit quality.” Issuers with stronger credit ratings are likely to be in a better position to meet debt obligations should the economy face challenges in the coming months.

Check-in with your wealth planning professional to make sure you’re comfortable with your current investments and that your portfolio remains consistent with your goals, feelings toward risk and time horizon.