The US bond market once again approached another recession signal on Wednesday, with the 2-year to 10-year US Treasury yield curve almost closing in positive territory for the first time since 2022, and ending the inverted yield curve that began during the 'Black Monday' storm in global markets last month.

According to Dow Jones market data, the trading price of the 2-year US Treasury yield has been higher than the 10-year Treasury yield for a record-breaking 544 trading days, including Wednesday.

This key yield curve inversion has long been a reliable predictor of past US economic recessions. However, as strategists note, when the yield curve eventually returns to positive territory after being inverted, it can often bring trouble for the US economy and potentially for the stock market.

According to FactSet data, the 2-year and 10-year US Treasury yields remained almost equal after briefly turning positive on Wednesday. To officially mark the end of the inversion, the 10-year US Treasury yield would need to be higher than the 2-year US Treasury yield.

According to Dow Jones market data, the last time the 2-year to 10-year Treasury yield curve was in positive territory was on July 1, 2022. The data goes back to 1977.

Investors last closely watched the trend of the yield curve in October 2019. A few months later, the COVID-19 pandemic broke out, followed by a brief economic recession.

Is the rate cut expectation too aggressive?

Some strategists believe that even if economic growth appears to be slowing down, an economic recession can still be avoided.

Guy LeBas, Chief Fixed Income Strategist at Janney Montgomery Scott, said on Wednesday, "There is no evidence that an economic recession is imminent."

However, LeBas pointed out that traders have priced in about 10 rate cuts for this cycle. "This seems aggressive," he added. Historically, in the case of a soft landing, the Fed has cut interest rates an average of three times every three quarters, while 10 rate cuts would indicate that something worse is happening in the economy.

Years of ultra-low interest rates may be a reason why the reliable indicator of economic recession has not worked this time.

Looking ahead, the performance of the stock market is mixed after the U.S. Treasury yield curve ended its inverted trend in the past. Looking back at the past 40 years, when the yield curve was in positive territory for 50 trading days or more, the S&P 500 index averaged a 2.6% increase three months later.

But according to Dow Jones market data, the stock market fell 11% within three months after the yield curve ended its inverted trend in 2000, and fell 12.9% after one year.

LeBas said he is preparing for Friday's monthly non-farm employment report to measure the strength of the US economy, especially in the context of market tension and anxiety at the beginning of September.

He also mentioned that the substantial issuance of corporate bonds on Tuesday, as well as another round of strong issuance on Wednesday, may "divert some funds from the stock market".

Editor/Emily