2025: The Year of “Un-inverted” Yield Curves
Published January 15, 2025
Kevin Flanagan
Head of Investment and Fixed Income Strategy
Key Takeaways
- U.S. Treasury yield curves have normalized after prolonged inversion, with the 2s/10s and 3-Month/10-Year constructs now turning positive.
- Federal Reserve rate cuts and a macro narrative shifting toward moderate growth and bumpy inflation have driven this “un-inversion,” yet the yield curve slopes remain relatively flat compared to historical norms.
- Fixed income strategies should prioritize managing volatility and duration, as extending duration remains challenging despite a return to positive yield curves.
Listen to the accompanying episode of the Basis Points podcast:
In last week’s blog post, I continued the discussion of our Rate Normalization theme, specifically focusing on where the U.S. Treasury (UST) 10-Year yield could possibly be headed. For this week, I wanted to expand on the topic and address our base case—that Treasury yield curves have also begun to normalize and will remain positively sloped in 2025.
As a reminder, when discussing UST yield curves, the two most closely watched gauges are the 2-Year vs. 10-Year and 3-Month vs. 10-Year constructs. Here are some facts and forecasts:
U.S. Treasury Yield Curves
Source, Bloomberg, as of 1/13/25.
- UST yield curves entered inverted, or negative, territory in the middle to latter portion of 2022 and remained there until relatively recently
- The move back into un-inverted territory was a direct result of the Fed’s rate cuts and the macro narrative shifting back to moderate growth and bumpy inflation
- As of this writing, the 2s/10s and 3-Mo/10-Yr constructs now carry positive readings of about +40 and +45 basis points, respectively
- The UST yield curve is expected to remain in positive territory regardless of whether the Fed cuts rates or not this year
- Although the curves are back into the plus side of the column, they are still notably below the positive readings that were registered at this time two years ago, and the slope can be considered relatively flat
Conclusion
Positioning within the U.S. fixed income arena has become an exercise of managing both volatility and duration. As we have seen time and time again, extending duration has proven to be a fleeting strategy, and I don’t see that changing in the months ahead, despite the fact that UST yield curves have now un-inverted.
About the contributor
Kevin Flanagan
Head of Investment and Fixed Income Strategy
Kevin serves as the Head of Investment and Fixed Income Strategy. In this role, he writes macro and fixed income-related content and works closely with the sales, research and marketing teams. In addition, Kevin conducts client-facing webinars and meetings, providing expertise on WisdomTree’s existing and future bond ETFs. Prior to joining WisdomTree, Kevin spent 30 years at Morgan Stanley, where he was Managing Director and Chief Fixed Income Strategist for Wealth Management. He was responsible for tactical and strategic recommendations and created asset allocation models for fixed income securities. He was a contributor to the Morgan Stanley Wealth Management Global Investment Committee, primary author of Morgan Stanley Wealth Management’s monthly and weekly fixed income publications, and collaborated with the firm’s Research and Consulting Group Divisions to build ETF and fund manager asset allocation models. Kevin has an MBA from Pace University’s Lubin Graduate School of Business, and a B.S. in Finance from Fairfield University.