Aug 5 (Reuters) - U.S. Treasury yields tumbled to one-year lows on Monday and a closely watched part of the yield curve turned positive for the first time in two years, as concerns grew that the U.S. economy is heading into a downturn.
An inversion in the yield curve comparing two- and 10-year Treasury yields typically indicates that a recession is likely in the next one-to-two years, though this inversion has lasted longer than in previous episodes.
The curve then usually turns positive before a downturn begins, with short-term yields dropping faster than longer ones on expectations the Federal Reserve will cut interest rates to support a weakening economy.
"This is echoing similar historical parallels because the short-end has dropped like a rock because more rate cuts are being priced in," said Matthew Miskin, John Hancock Investment Management's co-chief investment strategist.
In the past four recessions - 2020, 2007-2009, 2001 and 1990-1991 - the 2/10 curve had turned positive by the time a recession occurred, according to a Deutsche Bank analysis published last year. The interval between a disinversion and the beginning of recession varied, ranging roughly between two and six months in those four instances.
Yields on interest rate sensitive two-year notes fell 19.4 basis points to 3.6784% on Monday, the lowest since May 2023. Benchmark 10-year note yields dropped 11.2 basis points to 3.684%, the lowest since June 2023.
The gap between two- and 10-year Treasury notes hit 0.4 basis points in early trade, turning positive for the first time since July 2022.
The disinversion is a signal that the market is "screaming that the Fed needs to cut rates," said Miskin. "Whether or not that's justified ... we'll just have to see how lasting this risk off environment is."
Reporting by Karen Brettell and Davide Barbuscia; Editing by Mark Potter
