Back to Normal! 2s10s Yield Spread Turns Positive.

The 2s10s yield spread turned positive last month based on a six-month trailing average. While the daily spread turned positive back in September 2024, this shift signals a broader normalization of interest rates towards their long term historical averages.

Uncertainty continues to put upward pressure on yields as markets await clarity on the Federal Reserve’s rate trajectory and the potential impact of the new administration’s trade policies on inflation.

Boston Fed President Susan Collins recently stated, "In my view… it’s really appropriate for policy to be patient, careful, and there’s no urgency for making additional adjustments, especially given all of the uncertainty."

Despite signs of a cooling labor market, job growth remains positive, and unemployment is still historically low. Wage growth has also outpaced inflation in recent months, supporting consumer spending. This continued economic strength reduces urgency for the Fed to cut rates aggressively, keeping yields elevated.

It's interesting to note, recessions sometimes occur as the yield spread turns positive, however, that hasn't proven to be the case today. Thus far, the economy has shown to absorb higher rates, suggesting markets may have been mispricing long-term rates too low... back to normal!