A 'yield curve' inversion occurs when the 2-year Treasury yield surpasses the 10-year rate, which could indicate a potential recession.

Since 2019, the and has not been inverted, but on Thursday, it happened, which could indicate a possible recession.

The 2-year note yield is now higher than the 10-year note yield, indicating a bond market phenomenon.

The 2-year to 10-year spread is closely monitored by investors and is often seen as a sign that the economy may be heading for a downturn when it inverts. This spread was last in negative territory in 2019, before pandemic lockdowns caused a global recession in early 2020.

In late trading on Thursday, the yield on the 10-year Treasury fell to 2.331%, while the yield on the 2-year Treasury was at 2.337%. After a brief inversion, both yields were trading at the 2.34% level in the latest trading.

(Click to monitor the spread in real time.)

According to Bespoke, when the curve inverts, there is a greater than 98% chance of a recession at some point in the next two years, and a better than two-thirds chance of a recession at some point in the next year.

CNBC data has confirmed that the 2-10 spread was technically inverted for a few seconds earlier Tuesday, although some data providers showed it earlier. However, many economists believe that the curve needs to remain inverted for a significant period before it provides a valid signal.

The yield curve is crucial for banks as it determines the difference between the cost of borrowing and the potential return on investment. If banks are unable to generate profits, lending activity decreases, leading to a slowdown in economic activity.

Although the yield curve can provide some indication of upcoming recessions, there is typically a significant delay, and analysts advise that additional evidence is necessary before investors should be concerned about a recession imminently occurring.

The yield curve's inversion could reverse if there is a resolution to the war in Ukraine or the Federal Reserve pauses in its rate-hiking cycle, which could lead to other signals such as a slowdown in hiring and an increase in unemployment, as well as early warnings in ISM and other data indicating a slowdown in manufacturing activity.

The yield curve inverted 422 days before the 2001 recession, 571 days ahead of the 2007-to-2009 recession, and 163 days before the 2020 recession, according to MUFG Securities.

Julian Emanuel, head of equity, derivatives and quantitative strategy at Evercore ISI, stated that while a recession is often signaled by an inverted yield curve, it is not always the case. He cited the example of 1998, when the curve inverted during the Russian debt crisis, but the economy managed to avoid a recession, followed by the failure of Long Term Capital Management.

"The last 30 years have seen few recessions, making it difficult to establish a definitive rule, especially when there is only one significant observation to support it," he stated.

Since 1978, the stock market has experienced six instances of the 2-year and 10-year yields inverting. Despite this, the market continued to perform positively, with the S&P 500 up an average of 1.6% per month following the inversions. However, one year later, the S&P 500 had increased by an average of 13.3%.

Over the long term, there is usually a recession, but it can occur six to 18 months in advance, and the stock market tends to peak between two and 12 months before the recession begins, according to Emanuel. While the probability of a recession in Europe is now a certainty, this is not the case for the U.S.

Evercore sees a 25% chance of a U.S. recession.

Some bond experts argue that the yield curve inversion is no longer a reliable recession predictor due to the Federal Reserve's significant market influence. The Fed's $9 trillion balance sheet, which includes many Treasurys, has suppressed long-end interest rates, meaning the yields of the 10-year note and the 30-year bond should be higher.

If the Fed had not implemented quantitative easing, the 10-year yield could have been around 3.7%, and the yield curve for the 2-year and 10-year would have been approximately 100 basis points apart, instead of being inverted.

Since the 2-year yield has climbed most rapidly, it reflects the Fed's rate hikes. Although the 10-year yield has also moved higher due to the Fed, it has been held back by flight-to-quality trades due to the Ukraine war. Yields move opposite price.

The 3-month yield to the 10-year yield is a more accurate recession forecaster, and that spread has been widening, indicating better economic growth.