After a little over two years, the yield curve is back to normal. That is to say, interest rates on longer-term bonds are once again higher than the interest rates of shorter-term bonds like two-year Treasuries.

Rates on 10-year Treasury bonds first fell below two-year Treasury rates back in July 2022, when investors feared then-rampant inflation would lead to a recession. Part of this defensive preparation included buying long-term bonds -- even at subpar interest rates -- since other kinds of investments could soon be losing ground. As of this week, though, this dynamic is no longer in place.

Except the uninversion of the long-inverted yield curve isn't quite what it seems to be on the surface. The inversion has been undone mostly because the market's now betting on more aggressive rate cuts than previously expected, suddenly dragging long-term interest rates much lower than shorter-term rates have fallen. And regardless of how it happens, the reversal of such an inversion doesn't necessarily mean we've sidestepped trouble. The recessions often predicted by a yield curve's inversion typically don't start until after the inversion is unwound.

Continue reading

Source Fool.com