U.S. yield curve hits deepest inversion since 1981: What is it telling us?

economictimes.indiatimes.com:

Treasury yield curve to its deepest inversion since 1981 on Monday, once again putting a spotlight on what many investors consider a time-honored recession signal. The U.S. central bank has hiked interest rates aggressively over the last year to fight inflation that hit around 40-year highs and remains above its 2% target rate.

The yield curve inverts when shorter-dated Treasuries have higher returns than longer-term ones. It suggests that while investors expect interest rates to rise in the near term, they believe that higher borrowing costs will eventually hurt the economy, forcing the Fed to later ease monetary policy. The phenomenon is closely watched by investors as it has preceded past recessions.

The yield curve briefly inverted to 42-year lows Monday as investors increasingly expect the Fed to raise its benchmark borrowing rates to keep inflation in check. Rate futures markets reflect a greater than 80% chance of a quarter-point hike later this month but much less conviction the Fed will proceed beyond that, even though Fed officials said in June a second quarter-point increase was likely by year end. The two-year U.S.

Treasury yield, which typically moves in step with interest rate expectations, was down 2.7 basis points at 4.850% Monday. The yield on 10-year Treasury notes was down 3.9 basis points at 3.780%. Here is a quick primer on what an inverted yield curve means, how it has predicted recession, and what it might be signaling now.WHAT SHOULD THE CURVE LOOK LIKE? The yield curve, which plots the return on all Treasury securities, typically slopes upward as the payout increases with the duration.