Tuesday, February 7, 2023
HomeMarketThe Bond Market Continues to Signal a Recession Is Coming

The Bond Market Continues to Signal a Recession Is Coming

The U.S. Treasury building. The Treasury yield curve remains inverted, which signals a recession is likely.

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Stefani Reynolds/AFP/Getty Images

The Treasury yield curve remains inverted, signaling that a recession is likely.

Even the three-month Treasury bill has been yielding more than the 30-year Treasury bond, a very rare occurrence, according to Citi Research.

In more normal times, longer-dated bonds typically fetch higher yields than shorter-dated ones, in part because of the risk associated with holding an asset for a longer period.

The three-month T bill was recently at 4.33%, well above the 3.58% for the 30-year Treasury bond.

“Financial conditions are likely to tighten further, leading to slower growth or an outright economic contraction,” according to a Dec. 2 note from Citi Research.

Much of the focus has been on the size of the inversion. For example the spread between the two-year and 10-year Treasuries was recently 80.4 basis points, the largest inversion since Oct. 2, 1981, according to Tradeweb ICE data.

Another troubling sign about the yield curve’s latest inversion is its longevity.

In a research note on Nov. 29, Bespoke pointed out that the inversion of the two- and 10-year Treasury yields had reached 102 trading days, the sixth-longest streak dating to 1977.

The two-year Treasury was yielding 4.38% on Tuesday morning, compared with 3.56% for 10-year note.

In the five previous periods in which that inversion lasted 102 trading days or longer, the subsequent performance of the
S&P 500
was mixed.

The median returns of that index over the next one-, three-, six- and 12-month periods “were weaker than the median for all periods, but the margin of underperformance was the widest in the one-year window,” according to Bespoke.

Not everyone sees the inversion as a definitive signal that a recession is coming, however.

George Pearkes, macro strategist at Bespoke, said he thinks a recession is likely.

“But you can’t use the Treasury market to say, ‘Oh, well, the inversion is entirely recession pricing and that it’s pricing a certain recession,’” he said, adding that it’s important to analyze the economic data to figure out the likelihood of a recession.

Write to Lawrence C. Strauss at lawrence.strauss@barrons.com

Credit: marketwatch.com

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