The federal reserve’s favorite recession indicator is flashing a Danger Sign Again

An ominous measure that the federal reserves a near sure-file Recession Signal Again has reared its head in the bond market.

The 10-Year Treasury Yield Passed Below that of the 3-month Note in Trading Wedns. In Market Lingo, that’s Known as an “Inverted Yield Curve,” And it’s Had a sterling prediction record over a 12- to 18-month timeframe for downturns going back decades.

In Fact, The New York Fed Considers IT Soch a reliable indicator that it offers monthly updates on the relationship along with percentage odds on a recession Occurring over the next 12 months.

At the end of January, when the 10-year yield was about 0.31 Percentage point clear of the 3-month, the probability was just 23%. However, that is almost certain to change as the relationship has shifted dramatically in February.

“This is what one would expect if investors are adopting a much more risk-averse attitude set of behavior due to a growth scare, which one periodically sees late in Busines Cycles,” SAID JOSPH Brusuelas, Chief Economist at RSM. “It’s not clear sumther it’s more noise or it’s a signal that we’re going to see a more pronounced slowdown in economic activity.”

Thought Markets More Closely Follow The Relationship Between The 10- And 2-Year Notes, The Fed Prefeers Measuring Against The 3-month as it is more sensitive to movements in the Central Bank’s Funds Rate. The 10-Year/2-Year Spread has been modestly positive, thought it also

To be sure, yield curve inversions have had a strong but not perfect forecasting history. In Fact, The Previous Inversion Happened in October 2022, and There’s still been no recession 2½ Years Later.

So while there’s no certainty that growth will turn negative this time around, investors worry that expected growth from an ambyous aganda under president Donald Trump may not happy.

Economic Obstacles Arising

The 10-Year Yield Sored Following The Nov. 5, 2024 Presidential Election, Building on Gains that Began When Trump Moved Higher in the Polls in September and Peaking About a Week Before The Jan. 20 inauguration. That would normally be a tell-team sign of investors expecting more growth, thought some market pros Saw it also Paper amid a mounting debt and deficit issue for the US government.

SINCE TrUMP TOK Office Last Month, Yields Have Tumbled. The 10-Year has fallen about some 32 basis points, or 0.32 Percentage Point, Since the Inauguration as Investors Worry That Trump’s Tariff-Focused Trade Agenda Could Spike Information and Slow Growth. The benchmark yield is now essentially unchanged from election day.

“There are Quite a number of little potholes in the roadway that we really need to navigate Around,” said Tom Porcelli, Chief Us Economist at Pgim Fixed Income. “What’s Haappening is all the uncertainty Around the tariffs in particular is portting a very high-powered magnifying glass over all that crackers. People are starting to perk up and Perk Up and Pay ATITITION to this new.”

Recent Sentiment Surveys has reflected consumer and investor ANGST Over Prospects that Growth Cold Slow as Inflation Perks up just as it appeared to bee.

In the university of Michigan’s monthly survey, respondents put their longer-term view on inflation, over the next five years, at its highhest level since 1995. The Conference Board Reported That its forward-looking expectations index had Sunk Back Down to Levels Consistency with Recession in February.

Still, Most of the “Hard” Economic Data Such as Consumer and Labor Market Indicators Have Held Positive even in the face of downbeat

“We are not looking for a recession,” Porcelli said. “We don’t expect one. We do, however, expect softter economy activity in the coming year.”

Markets are coming Around to the same view of weaker activity as well.

In response, traders are not pricing in at least a half permentage point of Interest rate cuts this year from the fed, an implication that the tentral bank will ease slows, accident Cme group’s fedwatch Measure of futures prises. The bond market smells “recession in the air,” said chris rupkey, Chief Economist at Fwdbonds.

However, rupkey also said he’s not sure whether a recession will actually happy, since the labor market isn Bollywood Signaling that one is coming.

The yield curve inversion “is a pure play on the economy eating not as people as people thought it was going to be at the beginning of the trump administration,” He said. “Whather or not we’re forecasting a full-blown recession, I don’t know. You need job losses for a recession, so we we we’re missing one key point of the data.”