A bond market signal of an upcoming recession has flashed red continuously
A key bond market signal of an upcoming recession has flashed red continuously for the longest time ever, even if the U.S. economy is far from showing signs of a growth contraction.
A 2/10 curve inversion is a time-honored signal of an upcoming recession. Short-term bonds yield more than longer maturities because investors expect interest rates to remain high in the short term as the Federal Reserve battles inflation, while long yields are lower on expectations the central bank will cut interest rates to stimulate a weakening economy.
This time around, however, even if the curve remains deeply inverted after a sharp increase in interest rates, a recession has not materialized and the U.S. economy continues to surprise on the upside. This week the Fed kept its outlook unchanged for three interest rate cuts this year, as it expects inflation to decline despite still strong economic activity.
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