Why the bond market's famed recession indicator may be flashing a positive sign for the economy

The bond market’s notorious recession gauge may actually be sending some good news about the economy.

The Treasury yield curve — which is often referred to in the context of the spread between the 10-year Treasury yield over the 2-year yield — has famously inverted leading up to US recessions, with short term yields rising above longer-dated rates.

Yet, the yield curve now appears to be flashing a different kind of signal: global bond yields are steepening, which occurs when short-term yields are falling, or when long-term yields are rising.

The effect can be seen across the maturity ladder, with the 3-month and 1-year Treasury yields at a lower level than they were last year, while the 30-year yield is at a slightly higher level.

The pattern is the opposite of the inversion that markets have historically seen in periods leading up to a recession — and it’s sending a “vastly underappreciated” positive signal for the economy, according to Fisher Investments.

The bond market is a mixed bag when it comes to economic signaling. Long-dated bond yields have climbed in recent months, partly due to concerns about the long-term fiscal outlook and inflation.

On the inflation side, the fear is that price growth is about to accelerate as the knock-on effects of higher oil prices work their way through the economy, which could cause interest rates to rise.

The silver lining to this dynamic is that, when short-term rates are lower relative to long-term rates, lending is more profitable, which could rev up growth by increasing the flow of money to people and companies, Fisher said.

“At a lag, steeper yield curves encourage faster loan growth, which delivers more capital to households and businesses to spend and invest — driving economic growth,” the money manager wrote in its first-quarter report, adding that it expects the bull market to rise alongside the economy.

Business lending has already accelerated over the past year. The balance of all commercial and industrial loans swelled to $2.8 trillion in March, up 5% over the last year, according to Fed data.

Capital expenditures, another reflection of business investment, has also climbed higher over the past five years, fueled in part massive data center and AI spending.

The steeper yield curve has drawn mixed commentary on Wall Street.

Jim Paulsen, a longtime market strategist, said in an April note that the steeper yield curve could be a sign that the US tech sector is about to underperform, as lower short-term rates will drive stronger performance across the broader market.

Researchers at BNP Paribas said they expected the yield curve to continue steepening, partly due to ongoing concerns about the budget deficit, which is raising yields on the long end. Meanwhile, the Fed looks on track to keep short-term rates “on hold” to keep inflation in check, they said in a report this month.