The bond market is on the brink of signaling that a series of Federal Reserve interest-rate hikes will start shifting the narrative toward the risk that the US economy stalls out. The extra yield investors demand to hold 10-year Treasuries over two-year notes shrank to as little as 17 basis points last week, the slimmest gap since early 2025. This so-called flattening of the curve increases the possibility that the 10-year will soon yield less than shorter maturities, a closely watched phenomenon known as a curve inversion. An inverted curve historically has offered a powerful signal: It has preceded each of the last eight recessions going back to the 1960s, although its predictive power proved faulty earlier this decade. It’s essentially bond investors’ way of showing they see the Fed pushing rates high enough to stymie the economy as it seeks to tame inflation.

That outcome would have broad implications across financial markets, particularly for stocks trading near record highs. It’s a scenario more investors are bracing for after the central bank raised rates this month for the first time in three years and indicated additional hikes are likely. It also drives home how the hawkish Fed is altering the balance of risks after a bond selloff that reflected burgeoning price pressures against the backdrop of robust growth.

"Seeing the two- and 10-year curve invert or flatten dramatically calls into question the idea that the economy is very strong and that is part of what’s being priced into the bond market," said Zach Griffiths, head of investment-grade and macro strategy at the research firm Credit Sights. The 2- and 10-year notes enter the week yielding roughly 4.9% and 5.2%, respectively. The 10-year yield, a key global bond benchmark, is around the highest since 2007.