Fed’s recession indicator signals potential economic downturn

Federal Reserve’s recession indicator signals potential downturn as 10-year Treasury yield inverts below 3-month note.

In Short

The bond market has indicated a potential recession as the 10-year Treasury yield has fallen below the 3-month note yield, creating an inverted yield curve. While analysts are cautious, most current economic indicators remain positive, and no imminent recession is forecasted.

An important indicator that the Federal Reserve relies on for predicting recessions has emerged in the bond market.

The 10-year Treasury yield has fallen below the 3-month note yield, creating an “inverted yield curve.” Historically, this inversion has signalled potential economic downturns within a 12- to 18-month period.

The New York Fed tracks this relationship and provides monthly updates on recession probabilities. At the end of January, the likelihood of a recession was reported at merely 23%, but this is expected to rise due to recent changes.

Analysts note that the inversion reflects heightened investor caution, often seen towards the end of business cycles. Notably, while the Federal Reserve prefers measuring yields against the 3-month note, the 10-year against the 2-year yield is also closely watched.

Yield curve inversions have proven to be reliable though not infallible predictors; the last inversion occurred in October 2022 without a recession following.

Recent data shows that the 10-year yield has decreased by approximately 32 basis points since President Trump’s inauguration, amid concerns regarding inflation related to his tariff policies.