The Yield Curve Is Flattening Fast. What Does It Mean for Stocks?

A warning signal is starting to flash in the U.S. bond market.

The spread between 2-year and 10-year Treasury yields has narrowed to around 22 basis points, down sharply from nearly 75 basis points in February. The gap between 2-year and 30-year yields has also been cut roughly in half over the past month.

The concern is that the curve could eventually invert, with short-term yields moving above long-term yields — a pattern that has historically been associated with rising recession risks.

The pressure is coming from a tricky mix of higher oil prices, inflation concerns and growing expectations for further Fed tightening. Goldman Sachs chief economist Jan Hatzius expects another rate hike at the Fed’s October meeting.

But the signal is far from definitive. Cleveland Fed research shows that yield-curve inversions have produced false alarms before, while Wells Fargo still sees a strong U.S. economy and remains bullish on stocks.

And with rates, oil and inflation all moving back into focus, the next few weeks could be telling for U.S. stocks.