The debate about the value of the Treasury spread for business-cycle analysis is set to intensify in the wake of the latest slide in the difference between the 10-year and 2-year rates. Although the US economic trend remains healthy, the ongoing decline in the yield spread implies trouble ahead, based on this indicator’s historical record.

US recessions over the last four decades have been preceded by a falling yield spread that lifts the 2-year rate above the 10-year rate – an inverted yield curve. Although the spread is still positive, the difference has narrowed to a relatively thin 65 basis points as of yesterday (Nov. 17) – the smallest spread in ten years. Note, however, that the 10-year/3-month spread has been comparatively stable recently, offering a mild counterpoint to the dark clouds linked with the 10-year/2-year data.

The primary driver of the falling spread is the surge in the policy sensitive 2-year yield, which rose to 1.72% on Thursday (based on daily data via Treasury.gov). That’s the highest yield in nine years for this maturity. The benchmark 10-year rate, by contrast, has been relatively steady this year. As of yesterday, the 2.37% for the 10-year Note is fractionally below the yield on the first trading day of the year.

“This [flattening] is a reflection that the Fed is still going ahead with raising rates even though inflation remains quite low,” Lou Brien, market strategist at DRW Trading, tells Reuters.

Some analysts are expecting that the yield curve will continue to flatten. “The peak yield on the 10-year Treasury should roughly approximate where the final level of fed funds settles out, so that to us implies a flat yield curve if we assume the Fed will do two or three hikes in 2018,” says Mark Vaselkiv, chief investment officer of fixed income at T. Rowe Price.

The question is whether the falling spread is signaling rising recession risk? Unlikely, reasons Charles Lieberman, chief investment officer at Advisors Capital Management. Writing for Bloomberg this week, he points out that a closer look at the historical record reveals that the 10-year/2-year’s warning “has varied sufficiently that an inversion can only be considered a weak signal, at best, of an impending economic decline.”