Inverted yield curves still a worrying recession sign


The bond market's recession indicator has been signalling an incoming downturn for several months, which could start this quarter. This is based on the inverted Treasury yield curves, specifically the spread between the 2-10 yields, and the spread between the 3-month and 10-year yields.

Short-term yields surpassing long-term yields are a highly watched signal of an incoming recession, with the inverted 2-10 spread accurately predicting recessions in the past. Observations suggest that a recession usually starts six-nine months after the inversion of the 2-10 year curve, and since those bond yields inverted in July 2022, the recession is certainly due.

The 2-10 year yield curve recently experienced its deepest inversion in over 40 years, with the inversion deepening in March as the collapse of Silicon Valley Bank unfolded, and a crisis of confidence in the banking sector emerged. The spread on the 3-month and 10-year yields did not react as savagely in March, but a deepening in the following weeks, may connote that a recession is starting.

High interest rates could easily push the economy into a downturn, and Fed officials have signalled rates are likely to remain higher for longer, which is expected to continue weighing on employment and corporate earnings, spelling trouble for stocks. A clue here will be a weakening of the labour market, which is still showing signs of resilience. Cracks may have already appeared with fewer job openings than forecast and continued jobless claims ticking up.

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Image by Gerd Altmann from Pixabay

Russell Shor

Senior Market Specialist

Russell Shor joined FXCM in October 2017 as a Senior Market Specialist. He is a certified FMVA® and has an Honours Degree in Economics from the University of South Africa. Russell is a full member of the Society of Technical Analysts in the United Kingdom. With over 20 years of financial markets experience, his analysis is of a high standard and quality.

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