The difference between the yield on the 2 and 10-year Treasury notes is the widest it’s been in about four decades, flashing a notorious warning of a looming recession and a possible sign of more pain to come for stocks, DataTrek said in a note on Monday.
The 2-year yield has surpassed the yield on the 10-year note for almost a year now, and that inversion has only deepened recently. The 2-year was trading at a yield of 4.241% Monday, compared to a yield of 3.578% on the 10-year.
It’s the steepest inversion since the early 1980s, and a potential grim omen for the economy, as an inverted yield curve has been a notoriously reliable indicator of a recession in the near term.
Recession fears have been elevated since the Federal Reserve aggressively tightened policy last year to rein in inflation, raising interest rates by 425-basis-points in 2022. Prices have cooled slightly from highs last summer, but commentators fear that raising rates past their current level could overtighten the economy into a recession.
The central bank is expected to raise interest rates to 5.1%, tacking on another 75-basis-points from current levels. But the 2-year Treasury yield, which is most sensitive to Fed policy, has been on the decline since early November, which could mean the bond market thinks the Fed is bluffing with its promise of more rate hikes, Fundstrat said last month.
Meanwhile, The World Bank is concerned that “further adverse shocks” could push the global economy into recession in 2023, with small states especially vulnerable. The warning is contained in an abstract for the bi-annual “Global Economic Prospects” report due for release on Tuesday and visible on the group’s Open Knowledge Repository website.
“Urgent global and national efforts” are needed to mitigate the risk of such a downturn as well as debt distress in emerging market and developing economies (EMDEs), where investment growth is expected to remain below the average of the past two decades, the Washington-based lender said.
“It is critical that EMDE policymakers ensure that any fiscal support is focused on vulnerable groups, that inflation expectations remain well anchored, and that financial systems continue to be resilient,” it said.
Similar demands have been made by central bankers from around the world as they aggressively raise interest rates to ease price pressures while governments support businesses and households by containing energy costs.
