The Yield Curve Just Became More Inverted, Hinting At A 2023 Recession

The yield curve for U.S. Treasuries is starting to invert following recent trends. This happens when shorter rates rise above longer ones. Historically this sort of move has signaled a recession is coming with notable accuracy over the post-war period.

Now, the yield curve is neither fully nor deeply inverted currently. However, the Fed are currently expected to raise rates many more times in 2022 and, if so, then depending on what happen at the long end of the curve, then the inversion could both become broader and deeper. That’s a worry for the U.S. economy given the potential power of this recession signal.

The State Of The Yield Curve

The yield curve has been flattening for much of 2022, but today the 2-year yield rose above the 10-year yield. For many, those are the two yields that are watched to determine yield curve inversion.

However, others prefer to watch the difference between 3 month and 10 year yields, that one is not inverted yet, but it could be by around December, if the Fed’s hawkish path to raise rates continues, as many expect.

Too Early?

Others point out that although yield curve inversion is generally a leading indicator of recessions a recession could still be far off. That means that maybe a recession is coming, but it could be a year or so away and often the stock market can maintain upward momentum until then. So the yield curve can be an early warning that a recession could be coming, rather than signaling imminent economic danger.

Plus of course, the signal may simply be wrong. The yield curve has a strong forecasting track record historically, but it’s not perfect.

Strong Track Record

Still the yield curve has a relatively strong record in accurately predicting recessions when compared to many economic indicators. So many stock investors will take note of today’s move.

The Fed are watching too. Currently they see a robust U.S. job market and worry about inflation running over 7%. However, if the yield curve continues to invert more broadly and deeply that may pose a concern as they consider raising rates over the remainder of the year.

What’s Next?

Today marks another step towards a broadly and more deeply inverted yield curve that if history is any guide, could be an indicator that a recession may be on the way in around 2023.

However, to be more convinced of that view many would look for 3 month rates being above the 10 year yield, and a deeper state of inversion across the yield curve, which is currently reasonably flat. Given the current state of the bond market and the Fed’s aggressive plans to rate short term rates, that situation may not be too far away.