Yield worries

Short-term interest rates are rising faster than longer-term rates, increasing the risk of an unusual, upside down situation that in the past has signaled a recession.

Short-term rates have risen thanks to four increases by the Federal Reserve since March 2017. Longer-term rates, though, have been slower to climb. This “flattening” of the yield curve means the premium investors get for holding riskier, long-term debt is smaller than it’s been in more than a decade.

As the yield curve flattens, it approaches the dreaded situation that has preceded each of the past seven recessions: An “inverted yield curve” is the rare occurrence when yields on short-term Treasurys are higher than for long-term bonds. Earlier this month, a 10-year Treasury was yielding just 0.42 percentage points more than a two-year Treasury. That’s the smallest gap since September 2007. For now, most economists say they’re not too concerned. Some investors believe the yield curve is a less reliable indicator this time, partly because bond-buying programs undertaken by central banks around the world have distorted markets. Historically it’s taken nearly a year for the yield curve to invert after the gap between two-year and 10-year Treasury yields fell below 0.50 percentage points. Even after inverting, it’s taken another 20 months before a recession hit, on average, according to LPL Research.