The yield on the 10-year Treasury note fell below that of the 3-month note on Wednesday, signaling an "inverted yield curve." This phenomenon, closely monitored by the Federal Reserve, has consistently predicted economic downturns over a 12 to 18-month period for decades. The inversion has heightened concerns among investors about potential economic slowdowns, as it reflects apprehension over President Trump's tariff-centric trade policies potentially spiking inflation and hindering growth.
Investors have witnessed the 10-year Treasury yield decline by approximately 32 basis points since President Trump's inauguration. This trend has been partly attributed to the market's response to trade tensions and their implications on economic stability. The Federal Reserve regards an inverted yield curve as a highly reliable indicator of an impending recession.
The New York Federal Reserve provides monthly updates on the yield curve relationship between the 10-year and 3-month Treasury yields, along with projections on the likelihood of a recession occurring within the next year. Despite a previous inversion in October 2022, the economy has not yet succumbed to a recession over two and a half years later, showcasing the unpredictability and complexity of economic forecasting.
Meanwhile, the spread between the 10-year and 2-year notes has remained modestly positive, though it has flattened significantly in recent weeks. Since President Trump assumed office, yields have generally declined, raising questions about the sustainability of current economic growth patterns.
At the end of January, the probability of a recession stood at 23% when the 10-year yield was roughly 0.31 percentage points above the 3-month yield. However, traders currently anticipate at least a half-percentage point reduction in interest rates from the Federal Reserve this year as growth slows. The CME Group's FedWatch tool indicates that investors are placing bets on potential interest rate cuts by the central bank.
Market professionals perceive the inverted yield curve as an ominous indicator. Chris Rupkey, chief economist at FWDBONDS, expressed that "the bond market smells 'recession in the air.'" However, he also noted uncertainty about an impending recession due to a lack of corresponding signals from the labor market.
"You need job losses for a recession, so we're missing one key point of the data." – Chris Rupkey
The 10-year Treasury yield experienced a surge following the November 5, 2024 presidential election, continuing an upward trajectory that began when Trump gained momentum in the polls in September. It reached its peak approximately a week before the January 20 inauguration. Interestingly, the benchmark yield remains largely unchanged from Election Day levels, highlighting persistent market volatility and fluctuating investor sentiment.
Despite growing concerns, some experts remain optimistic about future economic performance. Tom Porcelli emphasized that a recession is not currently anticipated.
"We are not looking for a recession," – Tom Porcelli
"We don't expect one. We do, however, expect softer economic activity in the coming year." – Tom Porcelli
The inversion’s emergence is perceived by some analysts as reflective of broader economic conditions evolving since the early days of Trump's administration.
"is a pure play on the economy being not as strong as people thought it was going to be at the beginning of the Trump administration," – Chris Rupkey