The Late-Cycle Canary: What the 30-Year/10-Year Yield Spread Is Telling Us
Why the 30Y–10Y Yield Spread Is Flashing a Clear Late-Cycle Warning
Financial markets have long viewed the slope of the yield curve – the difference between long- and short‑term bond yields – as a powerful signal about the health of the economy. A positively sloped curve, in which short‑term Treasury rates are lower than long‑term rates, tends to reflect expectations for steady growth and inflation. Conversely, an inverted or unusually steep curve often warns of impending economic turbulence.
The U.S. Federal Reserve Bank of New York notes that the term spread between the 10‑year and 3‑month Treasury rates is used to calculate the probability of a recession because the yield curve has historically outperformed other financial and macroeconomic indicators in predicting downturns two to six quarters ahead.
In other words, the yield curve is not just a curiosity for bond traders – it is a quantitative gauge of future economic conditions.
Most commentary focuses on the widely followed 2‑year/10‑year segment of the curve, but recent developments highlight the importance of the very long end. In particular, the spread between the 30‑year and 10‑year Treasury yields (the 30Y–10Y spread) has moved sharply higher after a prolonged period of inversion. Historically, such steepening episodes have only occurred on the eve of recessions. Alongside this unusual steepening, we are also witnessing a momentum crossover in the spread and a rise in unemployment levels. Taken together, these signals suggest that the U.S. economy is entering the later stages of its business cycle – what market analysts often describe as the “canary in the coal mine.”
This article dissects the 30Y–10Y yield‑spread signal through multiple lenses. First, it walks through a chart that combines the long‑end yield spread, a momentum indicator and the unemployment rate, showing how they align around recessionary episodes. Next, it explains why yield curve shapes carry predictive power for recessions and examines the current steepening. The article then considers structural forces such as fiscal deficits and inflation expectations that may be pushing long‑term yields higher. It also discusses speculative positioning in Treasury futures and the potential for a short squeeze. Finally, it offers a perspective on sovereign‑debt indicators that could help gauge whether fiscal pressures, rather than purely cyclical dynamics, are driving long‑end yields. Throughout, the piece remains mindful of the fact that the cyclical late‑phase signal appears strongest, while structural concerns serve as an undertone.
Understanding the 30Y–10Y Spread, Momentum and Unemployment Chart
The chart below synthesizes three separate metrics into a single narrative. The top pane plots the spread between the 30‑year and 10‑year Treasury yields. The shading denotes periods of official recession as dated by the National Bureau of Economic Research (NBER). Notice how the spread tends to rise sharply from an inverted or flat position just before recessions. For example, prior to the 1990–91 downturn, the 30Y–10Y spread inverted and then climbed quickly into positive territory. Similar behaviour occurred ahead of the 2001, 2008 and 2020 recessions. Each time, the spike in the long‑end spread signalled that the bond market was pricing in slower growth and a higher risk of downturn. The current surge in the 30Y–10Y spread therefore should not be dismissed as random noise. Instead it echoes a pattern that has preceded every major recession of the last four decades.
The middle pane illustrates the momentum of the 30Y–10Y spread using a moving‑average convergence–divergence (MACD) indicator. Here, the blue line represents the difference between two exponential moving averages of the spread, while the orange line is the signal line. When the MACD crosses above the signal line from below, momentum shifts from negative to positive, suggesting that long‑term yields are rising faster than intermediate yields. Historically, such crossovers have coincided with the onset of recessions (highlighted by red circles on the chart). Momentum crossovers emphasise that the recent steepening is not a temporary blip but a sustained move consistent with late‑cycle dynamics.