U.S. Treasury Yield Curve Flattens Amid Fed Rate Hikes
The Federal Reserve System raised interest rates to combat inflation, causing the Treasury yield curve to flatten and increasing the risk of a recessionary inversion.
The Federal Reserve System implemented its first interest-rate hike in three years to combat inflation, triggering a flattening of the U.S. Treasury yield curve. The gap between 10-year Treasuries and two-year notes narrowed to 17 basis points last week, marking the tightest spread since early 2025.
This shift in market sentiment follows a broader change in the economic outlook since the start of the U.S. war with Iran in February. An inverted curve has historically preceded every U.S. recession since the 1960s, suggesting investors fear the central bank may raise rates to a level that stalls economic growth.
Financial markets have already reacted to the trend, with the KBW Bank Index entering a technical correction. While some analysts expect the curve to steepen, others anticipate a full inversion within the next six months.
