How Much Can the Fed Hike Before the Yield Curve Inverts?

The market expects a 100% chance of a hike in June and a 78.2% chance of at least one more hike by September. Then what?

December Rate Hike Odds

10-Year Treasury Yield vs Fed Funds Rate

10-Year Treasury Yield Minus Fed Funds Rate

When Will the Yield Curve Invert?

Assuming the 10-year yields remains at 3.0% or above, the Fed can get in five hikes without inversion.

If the 10-year yield stays at 3.0%, the curve would be perfectly flat. Everything from 3 months to 10 years would be at 3.0%.

Let's call that unlikely, to say the least.

If yields on the long end do not go up, some portion of the curve is likely to invert after four hikes.

If yields on the long end drop, three rate hikes may cause inversion.

Spreads are already the tightest since 2007.

As the Fed hiked rates, the spreads between rates have narrowed. The difference between durations is often under 20 basis points, with a single hike measuring 25 basis points.

10-Year Minus 2-Year

Less than 50 basis points.

10-Year Minus 5-Year

Less than 20 basis points.

5-Year Minus 2-Year

Less than 40 basis points.

30-year Minus 10-Year

Less than 20 basis points.

Unless the long end of the curve rises, an inversion is coming if the market expectation regarding the number of hikes is accurate.

Mike "Mish" Shedlock

Comments (9)
No. 1-9

12-18 month later recession?


What are the situations in which someone would think it would make sense to buy a 10 year when they could get a 2 year at the same rate?


The situation goes something like this:

1) You're a central bank with a secret balance sheet and practically unlimited funds
2) You're far more interested in keeping the system afloat than chasing yield

Mom and pop sure aren't buying these 10-year treasuries.


One thing not factored in is how rising rates will affect the US budget. The higher the short term rate, the higher the borrowing costs for US gov't debt. Hard to predict how the market will react to that.