2s10s

One of the most-watched economic indicators is the 2s10s spread, which is simply the difference between the 10-year US Treasury yield and the 2-year US Treasury yield. Below is a chart of the 2s10s through time.

We can see how the 2s10s spread is calculated below, by simply subtracting the 2-year yield (red line) from the 10-year yield (blue line).

The 2s10s spread is often referenced because it provides a quick and simple indication of the slope of the yield curve. Historically, steep yield curves (indicated by a high 2s10s reading) are often followed by strong economic and financial market performance, while flat yield curves (indicated by low 2s10s readings) are followed by weaker performance.

Sometimes the yield curve flattens so much that it “inverts” and shorter-term rates are higher than longer-term rates (and the 2s10s reading goes negative). An “inverted yield curve” is typically seen as a warning sign as inverted yield curves are often followed by recessions (shown as vertical gray bars in both charts).

It is worth pointing out that the 2-year yield (red line) moves quite a bit more than the 10-year yield (blue line). In other words, the slope of the yield curve is often driven by the movements in shorter-term rates, which happen to be more closely linked with conventional monetary policy rates (such as the Fed Funds rate). Thus, rate hikes often flatten curve while rate cuts often steepen the curve, which makes sense when we think about the goals of monetary policy and economic performance following steep/flat yield curves.

The 2s10s is just one of many similar measures and curious minds can just as easily look up the 2s30s, 5s10s, 5s30s, and so on. Yet the 2s10s is one that many people watch and I believe it is worth watching as well.

Note: the above graphs are embedded directly from the Federal Reserve, so they should always show “live” data. However, you may have to hold your mobile device horizontally for them to render correctly.