(Bloomberg) -- The US yield curve is set to invert even further, barring a rapid drop in inflation, according to Greg Peters, a senior portfolio manager at PGIM Fixed Income. The yield curve inversion, which occurs when long-term interest rates fall below short-term interest rates, has historically been a strong indicator of an impending recession. The inversion deepened on Wednesday, with the difference between two- and 10-year Treasury yields reaching its widest point since 2007.
Here at The indicator we've been on recession watch ever since the yield curve inverted at the end of last year. The inversion has persisted, with the spread between 10-year and three-month yields remaining negative for several months. This inversion has preceded every recession since 1969.
The inverted yield curve is a closely followed recession indicator, but it isn't the only one to watch. Prior inversions have preceded a stock market correction, an increase in unemployment, and a decline in manufacturing activity. Several other indicator, such as the Purchasing Managers' Index and the Conference Board Leading Economic Index, show signs of a slowing economy.
The Treasury yield curve is sending a stark warning about recession risks, with the difference between two-year and 10-year Treasury yields falling below zero for the first time since 2007. The yield curve inversion has been driven by a combination of factors, including slowing global growth, trade tensions, and a dovish Federal Reserve.
The bond market is doubling down on the prospect of a US recession after Federal Reserve Chair Jerome Powell warned of a return to bigger balance sheets. The Fed's decision to pause rate hikes and end its balance sheet reduction program has been seen as a sign of concern about the economy. The yield curve inversion has also put pressure on the Fed to cut interest rates, with markets pricing in a 50% chance of a rate cut by September.
The Treasury curve suggests the widely anticipated US economic recession is near. Historically, the signal has brought pain to risk assets such as stocks and high-yield bonds. The yield curve inversion may also lead to a slowdown in lending, which could harm businesses that rely on credit to expand.
A closely watched measure of the Treasury yield curve is less inverted than it was earlier in March, though the reasons for the move are unclear. The curve steepened slightly on Thursday, with the spread between three-month and 10-year yields rising to 14 basis points. This could be a sign that investors are becoming less fearful of an imminent recession.
Despite the recent movement in the yield curve, many economists remain convinced that a recession is on the horizon. A survey of economists by the National Association for Business Economics found that 75% of respondents believe a recession will begin by the end of 2021. The survey also found that the trade war with China was the biggest risk to the economy.
In conclusion, the yield curve inversion is a strong indicator of an impending recession, and the recent deepening of the inversion suggests that the recession could be near. Other indicator also point to a slowing economy, and many economists believe a recession is inevitable. Investors should be cautious and consider reducing their exposure to risk assets in the current environment.
