Recession Red Flag Flashes as Bellwether 2–10 Yield Curve Inverts

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Choo Choo

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“O come, let us worship and bow down: let us kneel before the LORD our maker.”  Psalms 95:6 (KJV) 

A recessionary red flag was raised on June 13 when the yield curve inverted on the bellwether 2-year/10-year U.S. Treasury spread on expectations that the Federal Reserve might tighten monetary policy faster and further in a bid to tame soaring inflation.

The 2-year Treasury yields climbed above 10-year borrowing costs on June 13 for the first time since a brief inversion in April, with the gap falling to as low as minus 0.02 percentage points, Tradeweb prices showed.

The closely watched spread between the 2-year and 10-year Treasury yield is viewed by many analysts as one of the most reliable recession red flags.

The last time this bellwether yield curve inverted was in early April, when it quickly recovered. Prior to that, it inverted in 2019, before pandemic lockdowns the following year sent the economy into a recessionary spiral.

After the April inversion on the 2-year/10-year Treasury yield spread, Morgan Stanley strategists predicted it would once again invert and likely sustain that inversion for the rest of 2022. While they noted that historically such an inversion has signaled an “imminent” recession, they predicted that this time around it could be different.

“Overall, the yield curve has become less of a recession indicator over the last two economic cycles,” Morgan Stanley Chief U.S. Economist Ellen Zentner said in a statement at the time.

“And when we look at factors in the economy that are typically signals of a recession, such as job growth, retail sales, real disposable income, and industrial production, we don’t see an approaching recession.”

That picture hasn’t shifted much since April, as the near-term outlook for U.S. economic growth “remains in decent shape,” according to a recent note from ING analysts. But last week’s une…

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