Yield curve suggests imminent US recession

The spread between yields on the three-month US Treasury bill and the benchmark 10-year note has started going negative this week, signaling near-term recession risks, the Wall Street Journal has reported.

According to the publication on Wednesday, the spread between the rates inverted several times since Tuesday’s trading session. It finished the Wednesday session below zero for the first time since March 2, 2020, during the onset of the coronavirus pandemic. On Thursday, the spread ended the trading day at minus 11 basis points, the most negative level since February 28, 2020.

The US Treasury yield curve indicator has among the best track records in forecasting recessions across a range of economic variables. It has successfully called all recessions in recent decades without any false alarms. “Inversions have preceded both the 2008 financial crisis and the Covid-19 crash, and haven’t been seen since March 2020,” the WSJ wrote.

Until now, those who doubted the recession calls have been pointing to this spread, which managed to stay positive much of this year.

Meanwhile, a growing number of leading investors, executives and analysts have been sounding the alarm over what lies in store for the US economy. Many of them estimate there is a good chance of an economic recession within the next 12 to 18 months as soaring inflation remains a persistent problem for the economy.
 
This month’s survey of economists by the WSJ also found a 63% likelihood of recession within the year, pointing to the Federal Reserve’s interest rate hikes, which have come steep and fast after years with no activity. More than half of those surveyed suggested the central bank would keep increasing rates beyond what was healthy, eventually destabilizing the economy.

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