Oct 19, 2022 - Economy

Markets and economists are increasingly certain of recession

Yield differential between 3-month and 10-year U.S. Treasuries
Data: Factset; Chart: Erin Davis/Axios Visuals

Economists and market indicators seem increasingly certain that the U.S. is either already in a cyclical downturn, or soon will be.

Driving the news: Perhaps the most-watched market indicator for predicting recessions — a so-called inversion of the yield curve between 3-month and 10-year Treasuries — is now near at hand.

How it works: An inversion is a bit of bond market jargon that describes an unusual situation in which shorter-term Treasury yields rise above yields on Treasuries that mature later.

  • In recent days, the yield on 3-month Treasury bills shot sharply higher, while the yield on the T-note has been steady.
  • Now, the 10-year is yielding just 0.12 percentage points more than the 3-month bill — perilously close to going negative, aka inverting.

Why it matters: While large parts of the yield curve have been inverted for months, the relationship between 3-month and 10-year Treasuries has a special status.

  • Over the last 60-odd years, when this particular part of the Treasury yield curve has inverted, a recession has followed within two years.
  • That makes it perhaps the single best market-based indicator of recessions.
  • Check out this Q&A from Duke University finance professor Campbell Harvey, the dean of yield curve watchers, for more.

Zoom out: The yield curve isn't alone.

  • Since yet another hotter-than-expected inflation report earlier this month, economic forecasters have turned increasingly dour.

Unemployment remains remarkably low, but traditional rules of thumb say we're already in a recession since we've had two straight quarters of contracting GDP.

  • The official call on recessions is made by the NBER, however.

The bottom line: Both the markets and economists seem to think the current downturn, soft patch, or whatever you want to call it, is going to get worse.

Go deeper