The Lombard Review
Markets & Finance

The yield curve un-inverts. Is that good news?

Bull steepening precedes downturns

The Bureau of Engraving and Printing, which prints U.S. currency
The Bureau of Engraving and Printing, which prints U.S. currencyPhoto: Harrison Keely / Wikimedia Commons, CC BY 4.0
1 min read Data: 2s10s briefly positive (5 Aug)

The US sovereign yield curve staged an important structural milestone on 5 August, as the spread between two-year and ten-year Treasury yields briefly turned positive for the first time since July 2022. The un-inversion of the yield curve is traditionally celebrated by casual commentators as a return to normalcy. Financial history, however, suggests the opposite.

Canary Wharf seen from Wapping, East London
Canary Wharf seen from Wapping, East LondonPhoto: Diliff / Wikimedia Commons, CC BY-SA 3.0

The Bear Steepening Trap

A yield curve un-inversion driven by collapsing short-term yields—known as a 'bull steepening'—is not a sign of economic triumph; it is the classic historical harbinger of imminent recession. The curve un-inverts because markets are violently pricing in panic rate cuts to counter economic deterioration. The danger arrives not when the curve inverts, but when it snaps back to positive slope.

A $100,000 gold certificate, the largest U.S. note ever printed
A $100,000 gold certificate, the largest U.S. note ever printedPhoto: BrayLockBoy / Wikimedia Commons, Public domain

The un-inversion of the sovereign yield curve is not an economic all-clear signal, but a reliable historical siren warning that central bank easing is arriving in response to cyclical distress.