U.S. Yield Curve Normalization Signals Economic Resilience

U.S. yield curve normalizes, signaling economic optimism as inflation rises slightly; mixed performance in fixed income ETFs.

By Rony Abboud · December 16, 2024

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The U.S. yield curve inversion, which had persisted since mid-2022, ended in September 2024. This marked a pivotal shift in market dynamics, with the gap between 2-year and 10-year Treasury yields recently widening in a positive direction. This change reflects growing optimism about the U.S. economy’s future trajectory.

The Federal Reserve’s monetary easing has contributed to this normalization. With short-term rates declining — the Fed Funds rate now targeted at 4.25% in March 2025 and 4.00% in June — investors are recalibrating their expectations for sustained economic resilience. Meanwhile, rising long-term yields underscore renewed confidence in growth prospects, as the 10-year Treasury yield has steadily increased since late 2024, now standing at 4.40% (+25 bps over the week.)

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Implications for the U.S. Economy

The steepening of the yield curve carries important implications. Historically, an inverted yield curve has been considered a reliable predictor of recessions. Its recent normalization points to reduced risks of an economic downturn. The widening spread between long- and short-term rates reflects a more optimistic outlook, in line with strong consumer confidence and stable employment levels.

This shift mirrors historical cases, such as the mid-1990s, when a prolonged inversion ended without a recession. The current trend supports expectations of a potential soft landing for the U.S. economy, where inflation is controlled without triggering a significant contraction.

Inflation: A Gradual Rise

Inflation in the U.S. increased slightly in November 2024, marking its second consecutive month of slight increase. The Consumer Price Index (CPI) rose 2.7% year-over-year, up from 2.6% in October. Monthly inflation reached 0.3%, driven largely by housing and food costs. While these figures indicate a manageable rise, they highlight the Fed’s ongoing challenge of balancing price stability with economic growth.

ETF Performance

Fixed income ETFs showed mixed results this week. While the Government IG Long Term segment declined 4.38% last week (recording $1.6 billion outflow), the Government IG Money Market ETFs gained 0.090% over the same period, with over $1.1 billion inflows. Notably, the iShares 20+ Year Treasury Bond ETF

TLT

-0.78%

dropped 4.43%, reflecting pressure on long-term treasuries, the SPDR Portfolio Long Term Treasury ETF

SPTL

-0.72%

limited losses to 3.95% but gained $80 million.

Here’s a comparison between Government Bond ETFs

Group Data

Index Data

Group Data:
TLT
-0.78%
,
SPTL
-0.72%
,
TLH
-0.6%
,
EDV
-1.25%
,
ZROZ
-1.62%
,
SCHQ
-0.67%
,
GOVZ

Please note this article is for information purposes only and does not in any way constitute investment advice. It is essential that you seek advice from a registered financial professional prior to making any investment decision.

Topics

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FIXED INCOME

Segments

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US Government Bonds

-0.02%