Recession Warnings Rise, Limiting Fed’s Inflation Fight

Recession warnings are clearly on the rise. Much of the initial media fervor focuses on the inversion of the yield curve.

The 2-year and 10-year Treasury yields inverted for the first time since 2019 on Thursday, sending a possible warning signal that a recession could be on the horizon.” – CNBC

Of course, investors, analysts, and economists continue to debate the meaning of the 2-year/10-year yield-curve inversion. Since 1978, yield curve inversions consistently provide recession warnings.

Most of the yield spreads we monitor, shown below, have yet to invert. However, the best signals of a recessionary onset occur when 50% of the 10-yield spreads that we track turn negative simultaneously. Notably, it is always several months before the economy slips into recession and even longer before the National Bureau Of Economic Research officially dates it.

Recession Warnings, Recession Warnings Rise, Limiting Fed’s Inflation Fight
Source: Chart:

Such is essential as when yield spreads initially turn negative; the media will discount the risk of a recession and suggest the yield curve is wrong this time. However, the bond market is already discounting weaker economic growth, earnings risk, elevated valuations, and a reversal of monetary support.