THE YIELD CURVE FLIP AND WHAT IT MEANS: RECESSION INDICATORS?

A Perplexity-Driven Article Brought to you by The Woodworth Contrarian Fund

Current Yield Curve Analysis and Recession Indicators

The current U.S. Treasury yield curve presents a complex picture that, while sharing some similarities with the 2007 pre-recession environment, occurs within a markedly different economic context.

Current Yield Curve Status

As of October 1, 2025, the yield curve has normalized after the longest inversion period in U.S. history. The 10-year to 2-year Treasury spread currently stands at 0.57%, indicating a return to the typical upward-sloping curve where longer-term rates exceed shorter-term rates. This represents a significant shift from the deep inversion that persisted for 25 straight months from July 2022 through August 2024.[1][2][3]

The current curve structure shows:

• 3-month Treasury: 4.01%[3]

• 2-year Treasury: 3.55%[3]

• 10-year Treasury: 4.12%[4]

• 30-year Treasury: 4.72%[3]

Comparison to 2007

The comparison to early 2007 is indeed valid in several respects. Both periods featured:

Similar Timing in the Cycle: The 2006-2007 yield curve inversion lasted approximately 10-15 months, similar to how we've just emerged from the recent 25-month inversion period. In both cases, the curve inverted during a period of Federal Reserve tightening and subsequently normalized.[5][6]

Recession Lag Pattern: Historically, yield curve inversions have preceded recessions by 6-24 months. The 2006-2007 inversion preceded the Great Recession by approximately 12-18 months. Given that our recent inversion ended in August 2024, this timing pattern suggests heightened recession risk through mid-to-late 2025.[3][6][7]

Market Conditions: Both periods occurred after extended economic expansions with concerns about monetary policy being "too tight for too long".[8]

Recession Probability Models

Current recession probability models present mixed but concerning signals:

New York Fed Model: Based on the 10-year to 3-month Treasury spread, this model shows a 57.05% probability of recession within the next 12 months. This is significantly elevated compared to the long-term average of 14.85%.[9][10]

Alternative Models: The Cleveland Fed model indicates a 24.4% recession probability, while some private forecasts range from 20-45%.[11][12][13]

Conference Board Leading Indicators: The Leading Economic Index has triggered recession warning signals, declining for six consecutive months through August 2024.[14][9]

Key Differences from 2007

However, several factors distinguish the current environment from 2007:

Banking System Health: Unlike 2007, the banking system appears more resilient without the systemic leverage and toxic asset exposure that characterized the pre-financial crisis period.[15]

Labor Market Strength: While showing signs of cooling, the labor market remains relatively robust compared to the deteriorating conditions that preceded the 2008 recession.[14]

Inflation Context: The recent yield curve inversion occurred during a period of declining inflation rather than the building inflationary pressures of the mid-2000s.[16]

Federal Reserve Response: The Fed has already begun cutting rates proactively, with a 50 basis point cut in September 2024, potentially providing more policy space than was available in 2007.[17]

Current Assessment

The yield curve normalization itself can be interpreted in two ways. Optimistically, it suggests that recession fears are subsiding and markets expect economic stability. Pessimistically, historical patterns show that yield curve steepening (particularly "bull steepening" where short rates fall faster than long rates) often occurs immediately before recessions begin.[5][18]

The current 0.57% spread, while positive, remains below the long-term average of 0.85%, suggesting the curve is still relatively flat by historical standards.[3]

Conclusion

While the current yield curve shares similarities with early 2007, it is indeed indicative of elevated recession risk based on historical patterns. The combination of the recently ended longest inversion in history, elevated recession probability models (averaging around 25-55%), and triggered leading indicators suggests above-normal recession probability through 2025.

However, the recession is not inevitable. The Fed's proactive policy response, healthier banking system, and different underlying economic conditions may help achieve the elusive "soft landing" that was not possible in 2007-2008. The key will be monitoring whether the recent economic data deterioration accelerates or stabilizes in the coming quarters.

⁂ Citations Below

1. https://www.confluenceinvestment.com/asset-allocation-bi-weekly-oct-14-2024/

2. https://www.usfunds.com/resource/the-yield-curve-inversion-just-ended-but-economic-risks-remain/

3. https://ycharts.com/indicators/10_2_year_treasury_yield_spread     

4. https://ycharts.com/indicators/10_year_treasury_rate

5. http://omniawealth.com/interest-rates-real-rates-and-the-yield-curve-a-play-book-for-the-current-economic-cycle/ 

6. https://www.investopedia.com/terms/i/invertedyieldcurve.asp 

7. https://www.statista.com/statistics/1087216/time-gap-between-yield-curve-inversion-and-recession/

8. https://www.eagleasset.com/insights-and-commentary/yield-curve-inversion-0319

9. https://rhinowealth.com/the-rhino-report/october-2024-recession-watch 

10. https://www.economicgreenfield.com/2024/10/06/recession-probability-models-october-2024/

11. https://www.clevelandfed.org/indicators-and-data/yield-curve-and-predicted-gdp-growth

12. https://privatebank.jpmorgan.com/nam/en/insights/markets-and-investing/five-factors-we-use-to-track-recession-risk-and-what-they-say-now

13. https://russellinvestments.com/us/blog/us-recession-probabilities-2024

14. https://www.conference-board.org/topics/us-leading-indicators/ 

15. https://www.westernasset.com/sg/qe/pdfs/whitepapers/yield-curve-inversion-are-we-there-yet-2019-07.pdf

16. https://www.brookings.edu/articles/the-hutchins-center-explains-the-yield-curve-what-it-is-and-why-it-matters/

17. https://www.breckinridge.com/insights/details/october-2024-market-commentary/

18. https://phillipsandco.com/blog/the-curve-is-normal-are-we/

19. https://www.currentmarketvaluation.com/models/yield-curve.php

20. https://www.cnbc.com/2025/02/26/federal-reserves-favorite-recession-indicator-is-flashing-danger-again.html

21. https://www.marketplace.org/story/2024/09/12/inverted-yield-curve-recession-predictor-indicator

22. https://home.treasury.gov/resource-center/data-chart-center/interest-rates/TextView?type=daily_treasury_yield_curve&field_tdr_date_value=2024'

23. https://tradingeconomics.com/united-states/government-bond-yield

24. https://www.etftrends.com/fixed-income-channel/treasury-yield-snapshot-october-4-2024/

25. https://home.treasury.gov/resource-center/data-chart-center/interest-rates/TextView?type=daily_treasury_yield_curve&field_tdr_date_value=2025

26. https://www.cnn.com/2024/09/13/economy/inverted-treasury-yield-recession-indicator

27. https://fred.stlouisfed.org/series/T10Y2Y

28. https://www.npr.org/2024/10/16/1211483980/can-the-yield-curve-still-predict-recessions

29. https://home.treasury.gov/policy-issues/financing-the-government/interest-rate-statistics

30. https://www.ntsa-net.org/news/2024/9/rmd-rules-under-secure-2.0-focus-of-crs-primer/recession-or-not---what-the-longest-inverted-yield-curve-in-history-tells-us/

31. https://www.irs.gov/retirement-plans/monthly-yield-curve-tables

32. https://www.newyorkfed.org/research/capital_markets/ycfaq

33. https://www.equiti.com/sc-en/news/market-insights/analysis-of-the-inverted-yield-curve-in-the-us-bond-market/

34. https://www.chicagofed.org/publications/chicago-fed-letter/2018/404

35. https://www.dimensional.com/us-en/insights/is-a-yield-curve-inversion-bad-for-stock-returns

36. https://www.cnbc.com/2019/08/27/us-treasurys-investors-monitor-trade-developments.html

37. https://ig.ft.com/the-yield-curve-explained/

38. https://bravosresearch.com/the-macro-report/feds-recession-model-just-flashed-a-rare-signal/

39. https://www.stlouisfed.org/on-the-economy/2023/sep/what-probability-recession-message-yield-spreads

40. https://politicalcalculations.blogspot.com/2025/09/us-recession-probability-as-fed-finally.html

41. https://www.frbsf.org/research-and-insights/publications/economic-letter/2022/05/current-recession-risk-according-to-yield-curve/

42. https://www.imf.org/en/Publications/WEO/Issues/2024/10/22/world-economic-outlook-october-2024

43. https://en.macromicro.me/charts/6999/probability-of-us-recession-10y-and-3m-spread

44. https://www.comerica.com/insights/economic-insights/monthly-outlook/october-2024-us-economic-outlook.html

45. https://www.gam.com/en/our-thinking/investment-opinions/why-everyones-getting-the-us-economy-wrong

46. https://fred.stlouisfed.org/series/RECPROUSM156N

47. https://fred.stlouisfed.org/categories/33120

48. https://blog.umb.com/economy-october-economic-update-2024/

49. https://www.newyorkfed.org/medialibrary/media/research/capital_markets/prob_rec.pdf

50. https://www.ceicdata.com/en/united-states/recession-probability/recession-prob-yield-curve-3-month-treasury-yield

Original Perplexity.ai Prompt on 10/2/2025:

The current yield curve appears similar (in our view, not necessarily correct) to 2007. What does the current yield curve indicate? Is it indicative of a recession?

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