There’s a signal flashing in the bond market that says a recession is coming soon – DAVID RAUDALES

DAVID RAUDALES

Businessman, musician / former Full Stack Developer

DAVID RAUDALES UK

There’s a signal flashing in the bond market that says a recession is coming soon

AP Photo/Richard Drew

There’s a worrying signal in the bond market that suggests a recession could soon arrive.
The spread between the two-year and 10-year Treasury bonds has started to narrow.
As the yield curve de-inverts, that’s historically been a sign a recession is around the corner.

The long-awaited economic downturn could finally be on its way, experts warn, as evidenced by a shift in the bond market’s notorious recession gauge.

Investors have typically pointed to the spread between the two-year and 10-year Treasury yields as an indicator of a coming recession. The two-year yield surpassing that of the 10-year bond has been a signal that’s preceded every economic slump since 1955. 

But while the inversion between short and long-dated Treasurys is a sign of a recession somewhere on the horizon, the de-inversion has typically meant that a downturn is around the corner – and that’s what’s happening now. 

The 2-10 year yield curve is starting to de-invert as the 10-year Treasury note soars past a 16-year-high to edge closer to the two-year bond, a move that has commentators and top investors sounding the alarm. 

“This very recent move in Treasurys has been a little bit more dangerous,” JPMorgan Asset Management fixed income portfolio manager Priya Misra told CNBC on Wednesday. “I think the move in the Treasury market, the disinversion of the curve, I think that actually makes a hard landing much more likely,” she warned.

The yield on the 10-year Treasury note was around 4.743% on Wednesday, while the yield on the 2-year Treasury traded around 5.054%. That’s taken the 2-10 year spread to just 34 basis points, down from a difference of 108 basis points in July. 

Meanwhile, 10-year Treasury Inflation-Protected Security yields, which are adjusted for inflation, are currently hovering around 2.5%, Misra said. It’s the highest real rates have been since 2009, a sign that the economy is bound to feel more pain from a higher cost of borrowing.

“That’s going to hurt businesses. That’s going to hurt consumers. It’s just going to take some time,” Misra warned. 

“Bond King” Jeff Gundlach, who has repeatedly forecasted a recession for the US economy over the past year, also sounded the alarm on recent moves in the US Treasurys market.

“The US Treasury yield curve is de-inverting very rapidly,” Gundlach said in post on X, formerly known as Twitter, on Tuesday. “Should put every one recession warning, not just recession watch. If the unemployment rate ticks up just a couple of tenths it will be recession alert. Buckle up.”

Other of signs of weakness are also beginning to bubble up. The labor market has started to wobble, with job openings having dropped 27% from their peak in March 2022.

Consumers are also expected to pull back on spending as they chip away at student loan and exhaust excess savings they piled up during the pandemic, factors that could accelerate the onset of a recession, commentators warn.

Read the original article on Business Insider