MarketCharts.ai
Interest RatesJanuary 8, 2026•6 min read

Yield Curve Watch: Spread Turns Positive After 2+ Year Inversion

The 10Y-2Y Treasury spread has finally turned positive, ending one of the longest yield curve inversions in history. What does this mean for recession risk?

By MarketCharts.ai Research
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Key Takeaways

  • 10Y-2Y Spread: +0.65% (positive for first time since July 2022)
  • 10Y-3M Spread: +0.51%
  • Inversion Duration: 793 days (one of the longest on record)

The End of Inversion

After more than two years of inversion, the 10-year minus 2-year Treasury yield spread has finally turned positive. As of January 13, 2026, the spread stands at +0.65%, compared to its most inverted level of -1.08% reached in July 2023.

Historical Context

The 2022-2024 yield curve inversion was notable for both its depth and duration:

Metric2022-2024 Inversion2019 Inversion2006-2007 Inversion
Duration793 days6 days10 months
Max Inversion-108 bps-4 bps-19 bps
Preceded Recession?TBDYes (2020)Yes (2008)

Why It Matters

Yield curve inversions have historically been reliable recession predictors. Every U.S. recession since 1970 was preceded by a sustained yield curve inversion. However, the recession typically arrives 12-24 months after the curve re-steepens, not during the inversion itself.

The Steepening Process

The curve has normalized through a "bear steepening" process, where long-term rates rose faster than short-term rates:

Date2-Year Yield10-Year YieldSpread
Jul 20234.87%3.79%-1.08%
Jan 20244.31%4.02%-0.29%
Jul 20244.45%4.28%-0.17%
Jan 20254.22%4.52%+0.30%
Jan 20264.03%4.68%+0.65%

What's Driving the Steepening?

  • Fed Rate Cut Expectations: Markets anticipate the Fed will eventually cut rates, pushing 2-year yields lower
  • Fiscal Concerns: Large budget deficits are putting upward pressure on long-term rates
  • Term Premium: Investors are demanding higher compensation for holding long-duration bonds
  • Inflation Expectations: Persistent inflation concerns are elevating long-term yields

    • Recession Implications

    The historical pattern suggests elevated recession risk in the 12-24 months following yield curve normalization. However, this cycle has been unusual in several respects:

    • No recession during inversion: Unlike prior cycles, the economy remained resilient throughout the inversion period
    • Strong labor market: Unemployment remains low at 4.4%
    • Solid GDP growth: The economy grew 2.8% in 2025

    Some economists argue the traditional recession signal may be muted this time due to structural changes in Treasury markets, including Fed balance sheet policies and increased foreign demand for U.S. debt.

    What to Watch

    • Steepening Pace: A rapid steepening could signal stress
    • Credit Spreads: Watch for widening in corporate bond markets
    • Leading Economic Indicators: LEI has been declining but at a slower pace
    • Bank Lending: Credit conditions remain key to the outlook

    Our View

    While the yield curve's return to positive territory is mechanically bullish for banks and other spread-dependent businesses, the historical record suggests caution. We maintain a watchful stance on recession indicators through mid-2027.

    Data sourced from the Federal Reserve via FRED. Analysis represents the views of MarketCharts.ai Research and is for informational purposes only.
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