(Reuters)

U.S. Treasury yields tumbled to one-year lows on Monday and a closely watched part of the yield curve turned positive for the first time in two years, as concerns grew that the U.S. economy is heading into a downturn.

An inversion in the yield curve comparing two- and 10-year Treasury yields typically indicates that a recession is likely in the next one-to-two years, though this inversion has lasted longer than in previous episodes.

The curve then usually turns positive before a downturn begins, with short-term yields dropping faster than longer ones on expectations the Federal Reserve will cut interest rates to support a weakening economy.

“This is echoing similar historical parallels because the short-end has dropped like a rock because more rate cuts are being priced in,” said Matthew Miskin, John Hancock Investment Management’s co-chief investment strategist.

In the past four recessions – 2020, 2007-2009, 2001 and 1990-1991 – the 2/10 curve had turned positive by the time a recession occurred, according to a Deutsche Bank analysis published last year. The interval between a disinversion and the beginning of recession varied, ranging roughly between two and six months in those four instances.

Yields on interest rate sensitive two-year notes fell 19.4 basis points to 3.6784% on Monday, the lowest since May 2023. Benchmark 10-year note yields dropped 11.2 basis points to 3.684%, the lowest since June 2023.

The gap between two- and 10-year Treasury notes hit 0.4 basis points in early trade, turning positive for the first time since July 2022.

The disinversion is a signal that the market is “screaming that the Fed needs to cut rates,” said Miskin. “Whether or not that’s justified … we’ll just have to see how lasting this risk off environment is.”

(Reporting by Karen Brettell and Davide Barbuscia; Editing by Mark Potter)