Yield Curve Flattening Carries a Warning About Looming Rate Hike Cycle

The long end of the yield curve has inverted for the first time since 2009.

November 01, 2021

The long end of the U.S. Treasury curve has inverted, with 30-year yields falling below 20-year yields for the first time since 2009. The flattening yield curve could be an indicator that the Fed will raise rates to a degree that could threaten another recession in a few years.

The Long End of the Treasury Curve Has Inverted for the First Time Since 2009

20-year/30-year Treasury Yield Curve (basis points)
20-year-30-year Treasury Yield Curve (bp)

Source: Guggenheim Investments, Federal Reserve, Haver Analytics. Monthly average data as of 10.29.2021. Dot indicates latest datapoint.

An inversion of the long end of the curve is counterintuitive given the Fed’s looming tapering announcement, but the flat forward curve—measured by the three-year forward 3-month/10-year swap curve—indicates that the market is likely looking ahead to the economic impact of the hiking cycle to follow. We expect the Federal Open Market Committee to announce the tapering of quantitative easing at its Nov. 3 meeting, with purchases likely to end in mid-June 2022. We have also moved forward our expectation that fed funds rate hikes will begin in the fourth quarter of 2022. A rapidly tightening labor market and a persistent overshoot of the inflation target may justify raising the fed funds target to a terminal range of 2.00–2.25 percent.

History shows that an inverted 20s/30s curve on its own does not necessarily predict a recession, but the flat forward curve has been a stronger indicator. The three-year forward 3-month/10-year swap curve stands at just 26 basis points, and based on data from the last three business cycles, that level has historically preceded recessions by an average of 28 months.

A Flat Forward Curve Has Foreshadowed Future Business Cycle Risks

3-Year Forward 3-month/10-year Swap Curve (basis points)
3-Year Forward 3-month-10-year Swap Curve (bp)

Source: Guggenheim Investments, Bloomberg. Monthly average data as of 10.29.2021. Dot indicates latest datapoint. Bp = basis points. Past performance does not guarantee future results.


From the Office of the Global Chief Investment Officer, Scott Minerd
By the Guggenheim Investments Macroeconomic and Investment Research Group

Important Notices and Disclosures

Investing involves risk, including the possible loss of principal. Investments in fixed-income instruments are subject to the possibility that interest rates could rise, causing their values to decline. High yield and unrated debt securities are at a greater risk of default than investment grade bonds and may be less liquid, which may increase volatility.

Basis point – One basis point is equal to 0.01 percent.

This material is distributed or presented for informational or educational purposes only and should not be considered a recommendation of any particular security, strategy or investment product, or as investing advice of any kind. This material is not provided in a fiduciary capacity, may not be relied upon for or in connection with the making of investment decisions, and does not constitute a solicitation of an offer to buy or sell securities. The content contained herein is not intended to be and should not be construed as legal or tax advice and/or a legal opinion. Always consult a financial, tax and/or legal professional regarding your specific situation. 

This material contains opinions of the author, but not necessarily those of Guggenheim Partners or its subsidiaries. The opinions contained herein are subject to change without notice. Forward looking statements, estimates, and certain information contained herein are based upon proprietary and non-proprietary research and other sources. Information contained herein has been obtained from sources believed to be reliable, but are not assured as to accuracy. No part of this material may be reproduced or referred to in any form, without express written permission of Guggenheim Partners, LLC. There is neither representation nor warranty as to the current accuracy of, nor liability for, decisions based on such information. Past performance is not indicative of future results. 

Guggenheim Investments represents the following affiliated investment management businesses: Guggenheim Partners Investment Management, LLC, Security Investors, LLC, Guggenheim Funds Distributors, LLC, Guggenheim Funds Investment Advisors, LLC, Guggenheim Corporate Funding, LLC, Guggenheim Partners Europe Limited, Guggenheim Partners Fund Management (Europe) Limited, Guggenheim Partners Japan Limited, GS GAMMA Advisors, LLC, and Guggenheim Partners India Management.



Are High-Yield Markets Misjudging Evergrande Risk? - Featured Perspectives
November 24, 2021

Are High-Yield Markets Misjudging Evergrande Risk?

High-yield investors should be weighing the risks of contagion more carefully.

Things Couldn’t Be Better - Featured Perspectives
July 30, 2021

Things Couldn’t Be Better

The COVID Delta Variant’s Looming Threat to Risk Assets.

A Better Way to Pay for Infrastructure Investments - Featured Perspectives
July 26, 2021

A Better Way to Pay for Infrastructure Investments

A revival of the Obama-era Build America Bonds would raise funds with less taxes.


Fixed-Income Outlook 

Midyear 2021 Outlook

Brian Smedley, Chief Economist and Head of Macroeconomic and Investment Research, and Portfolio Manager Adam Bloch provide our macro and markets outlook.

The Long Road to Recovery 

The Long Road to Recovery

Scott Minerd, Chairman of Investments and Global CIO, discussed his outlook for markets and the economy with CNBC’s Brian Sullivan during the Milken Institute 2020 Global Conference.