Why 10-year Treasury yield's recent drop could be a recession indicator

By Vivien Lou Chen

The decline in the 10-year yield marks a notable drop from the closing level of almost 5% reached in January

A combination of slowing U.S. economic growth prospects, possible interest-rate cuts by the Federal Reserve and concerns about the central bank's long-term independence were sending the 10-year Treasury yield down toward 4%.

The benchmark 10-year Treasury yield has fallen substantially from where it was at the beginning of the year, weighed down by expectations for weaker economic growth that contrast with the strong growth trajectory investors and traders had anticipated in January.

After peaking at 4.8% on a closing basis for Jan. 13 - a week before President Donald Trump's inauguration - the yield has since fallen to around 4.05% as of Monday on concerns that the U.S. economy is not nearly as healthy as initially thought. It is near its lowest level of 2025 and down by more than half a percentage point since January as the underlying 10-year note has largely rallied.

A falling 10-year yield BX:TMUBMUSD10Y can be seen as either good or bad for stocks, depending on how it ends up being interpreted by investors and traders. Generally speaking, such a decline reduces the cost of capital and borrowing for companies, thereby boosting the present value of their future earnings and valuations of their shares. But a lower long-term Treasury yield also tends to mean reduced confidence in the U.S. economic outlook.

Right now, the 10-year yield "could be seen as a recession indicator," said Derek Tang, an economist at Monetary Policy Analytics in Washington, D.C. In addition, it may be capturing long-term worries about the Federal Reserve's independence in a way that the 2-year yield might not, he said via phone on Monday.

Its downward trajectory also appears to have "a lot to do with the probability that the Fed is going to cut rates," he said. "The question is if it is a choice to cut or a need to cut. If it is a choice to cut rates, that's great for equities, because that means the Fed is preventing a recession and providing more of a safety net. If the Fed has to cut, that sounds like the Fed is catching up to the reality of a slowdown or recession that already has momentum. What that means is equities will feel some pain."

Strategists at BofA Securities are among those who now think the 10-year yield will end the year at 4%, versus a prior forecast of 4.25%, following last Friday's weaker-than-expected jobs report for August. The economy added just 22,000 new jobs last month as the unemployment rate climbed to an almost four-year high of 4.3%.

Interestingly, the 10-year yield continued to decline on Monday despite expectations that this Thursday's consumer-price index report for August could show that inflation has remained elevated. The widely followed long-term rate fell 4 basis points to just under 4.05%. That is its lowest closing level since April 4, or just a few days after Trump's "liberation day" announcement on a broad package of tariffs triggered increased volatility in global markets.Separately on Monday, the policy-sensitive 2-year Treasury yield BX:TMUBMUSD02Y dropped 1.3 basis points to a three-year low of 3.49% as all three major U.S. stock indexes DJIA SPX COMP finished higher.

Will Compernolle, a Chicago-based strategist for FHN Financial, said via phone that the declining 10-year yield is an illustration of "how different the macro environment is since the beginning of this year, when so many people thought the 'Trumpflation' trade of higher growth and an uptick in inflation was going to characterize 2025."

Instead, "it now looks like we are going into a slower growth environment," and the 10-year yield's march downward in the last couple of months reflects reduced growth expectations, the strategist added. In his view, this development is more likely to eventually be treated as a "risk-off move" rather than a good development for equities. It would likely take an acceleration in job growth to change this view, he said.

-Vivien Lou Chen

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09-08-25 1606ET