A Classic Warning Sign of Recession Is Flashing

Economists are keeping an eye on yields for 2- and 10-year Treasurys
By John Johnson,  Newser Staff
Posted Apr 1, 2022 10:12 AM CDT
A Classic Warning Sign of Recession Is Flashing
In this file photo, shoppers are seen in an Apple store Park Meadows Mall in Lone Tree, Colo.   (AP Photo/David Zalubowski)

A wonky-sounding phenomenon in the bond market known as a "yield curve inversion" took place this week, and it's caught the attention of economists. The reason? It just happens to be a classic warning sign that a recession might be in the cards. Details:

  • The flip: The 2-year and 10-year Treasury yields inverted on Thursday for the first time in three years, reports CNBC. For a few minutes, the 2-year yield rose higher than the 10-year yield. Things reverted quickly, but the inversion happened again on Friday morning, per a separate CNBC story. The upshot is that it suggests investors are growing leery about the economy's long-term outlook.

  • The warning: The inversion "has sent a warning sign for investors that a recession could follow," per Reuters. "The last time it inverted was 2019 and the following year, the United States entered a recession—albeit one caused by the global pandemic."
  • Track record: But it wasn't just 2019. "That inversion is seen as a signal of an economic downturn by many, because it has preceded every recession since 1955, with just one false alarm in the late 1960s," per Barron's. However, "it's not time to worry," the analysis adds, given the many variables at work (including Fed action) before any recession comes into play. What's more, the lag time between the warning sign and a subsequent recession can be a year or more.
  • Psychological: "A lot of people focus on this and there could be a self-fulfilling expectation, they see the 10 year/2 year invert and believe there will be a recession and change behavior," Campbell Harvey of Duke University tells Reuters. "So if you're a company you cut back capex (capital expenditures) and employment plans." For the record, the Federal Reserve considers the link between the inversion and recession "spurious."
(Read more recession stories.)

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