Treasury Yields Snapshot: September 26, 2025

The article analyzes the historical reliability of inverted yield curves (10-2 and 10-3mo spreads) as leading recession indicators, noting the 10-2 spread was continuously negative from July 2022 to August 2024 and last negative on September 5, 2024, while the 10-3mo spread was negative from October 2022 to December 2024 and has since fluctuated. These past inversions historically precede recessions by 3-11 months, with variable lead times. Concurrently, the 30-year fixed mortgage rate has recently declined to 6.30% despite the Federal Reserve holding rates steady, a divergence from typical correlation after an earlier period where mortgage rates rose during Fed rate cuts, signaling complex market dynamics.

Analysis

As of September 26, 2025, the Treasury yield curve is in positive territory, with the 10-year note at 4.20% and the 2-year at 3.63%. This normalization follows a significant and prolonged period of inversion, a historically reliable recession indicator. Specifically, the 10-2 spread was continuously negative from July 2022 to August 2024, and the 10-3 month spread was inverted from October 2022 to December 2024. Historically, the lead time from an initial inversion to a recession averages around eleven months, placing the current economic environment well within the typical risk window. The recent steepening of the curve does not necessarily negate this signal, as spreads often turn positive just prior to an officially declared recession. Compounding this outlook, the 30-year fixed mortgage rate has recently declined to 6.30% while the Federal Reserve has held rates steady, a notable decoupling that suggests bond market participants may be pricing in future economic weakness or a shift in monetary policy independent of the Fed's current stance.

Key Decisions for Investors

• Investors should remain cautious on growth-sensitive assets, as the prolonged yield curve inversion from 2022-2024 remains a strong historical precedent for a potential economic slowdown, even though the curve is currently positive.
• Consider the recent divergence between mortgage rates and the Fed funds rate as a key signal that the long-end of the bond market is anticipating an economic slowdown, which could favor positions in longer-duration fixed income assets like VGLT.
• Monitor the 10-2 and 10-3 month spreads closely; while the inversion has ended, historical patterns show the curve often steepens ahead of a recession, making the current trend a critical data point rather than an all-clear signal.
• Given the ambiguity and variable lead times associated with yield curve signals, portfolio construction should account for continued volatility and the possibility of a 'false positive,' as seen in 1998.