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"It's the what-if scenario".

The highly watched two-year, 10-year part of the yield curve is likely to follow suit, said Ian Lyngen, head of United States rates strategy at BMO Capital Markets in NY. A separate spread between 3-month and 10-year Treasury securities, considered by some as a better recession predictor, was also falling, though at just around 0.5 percentage point it remained comfortably in positive territory.

No - and that's why this latest flip in yields may not augur recession.

Actually, I expect a recession before that portion of the curve inverts.

Usually it's the other way around, and it means investors are anxious about the short-term health of the economy.

A central focus is whether it means the market is second guessing the Fed, which has been raising interest rates for three years and is expected to lift them further, including at their next meeting in two weeks.

Gundlach is founder and chief executive of DoubleLine which manages more than $120 billion, according to its website.

The so-called bond king told Reuters that the phenomenon is predicting that the "economy is poised to weaken". Markets interpreted this as a signal of a slowdown in rate hikes.

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Hedge funds and other speculators had amassed a record level of bets on declines in Treasury prices through the futures market, with the heaviest bets lodged against 5-year maturities.

A bond yield is the return an investor gets on a government or corporate bond. "I do think it's overdone with short-covering and unwinding of money-losing positions". A rate hike however, while signaling confidence by the Fed, would continue to make financing more expensive for firms and households.

The dollar, which started the week on a weak footing as the apparent thaw in trade tensions between the USA and China cooled demand for the safe-haven currency, extended its fall as investors anxious about the inversion of the short end of the US yield curve in bond markets.

Those potential explanations aside, the US economy is in the middle of its second-longest expansion on record, and economists and investors are mindful that a downturn is inevitable. Powell in remarks last week reiterated his upbeat outlook of an economy growing above potential, with the unemployment rate the lowest in almost 50 years, and in no need of emergency level interest rates.

The yield curve inversion and comments from Fed speakers are causing investors to rethink the potential of a recession or if rate hikes are nearing the top, said Minh Trang, senior FX trader at Silicon Valley Bank in Santa Clara, California.

In a flat yield curve, there's little difference between short-term yields and long-term yields.

While Fed officials have begun pointing to "headwinds" from slowing global growth and other risks, it won't be clear how much this has changed their outlook until they issue fresh economic projections after the December 18-19 policy meeting.