2/10 Treasury Spread (T10Y2Y)The 10-year minus 2-year Treasury bond spread is generally considered to be an advance warning of severe weakness in the stock market; credit spreads often widen during times of financial stress wherein the flight-to-safety occurs towards safe-haven assets such as U.S. treasuries and other sovereign instruments. Yield curve inversion takes place when the longer term yields falls much faster than short term yields. This happens when there is a surge in demand for long term Government bonds (e.g. 10 year US Treasury bond) compared to short term bonds. The yield curve is often viewed as a leading indicator of recessions; its ability to anticipate economic downturns endures across specifications and time periods: an inverted yield curve has been viewed as an indicator of a pending economic recession. When short-term interest rates exceed long-term rates, market sentiment suggests that the long-term outlook is poor and that the yields offered by long-term fixed income will continue to fall.
