Apr 24, 2019

A reliable recession indicator is reversing course

Data: Treasury Department; Chart: Axios Visuals
Data: Treasury Department; Chart: Axios Visuals

Following a yield curve inversion in March that sent tremors through financial markets, the spread between 10-year Treasury notes and 3-month T-bills has reversed and widened.

Driving the news: The inversion caused significant worry among economists and some market participants as it is one of the most reliable financial market recession indicators available.

Yes, but: While a prolonged inversion would have been worrisome, analysts say the market isn't signaling all is well with the economy just yet.

  • "I'm actually surprised we haven't seen a more meaningful selloff in bonds, given the good news that has pushed stock prices up — the delay in Brexit, the trade war and expectations for a pickup in growth in the second half of the year," Subadra Rajappa, head of U.S. rates strategy at Societe Generale, told Axios.

What to watch: Rajappa says, the rise in yields hasn't pushed the spread between 10-year and 3-month Treasuries that much higher. The difference of 15 basis points is still very tight and near levels seen in 2007.

  • "The market's much more focused on what's happening globally," she said, including growth slowdowns in Europe, Japan and China.

Bonus: The yield curve is still inverted on the short end with 1-month bills holding higher yields than maturities as long as 5 years.

Go deeper: Will the yield curve lead to recession? It really is different this time

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