It is well known that talk of a recession surged after the (brief) inversion of the 10- to 2-year spread.
figure 1: 10-year-3-month Treasury spread (blue), 10-year-2-year spread (brown), both expressed as a percentage. Recession dates as defined by NBER are shaded in gray. Source: FRED, NBER and author’s calculations.
What is clear is that the 10-year to 3-month signals are very different. In previous recessions, both spreads were inverted.
figure 2: 10-year-3-month Treasury spread (blue), 10-year-2-year spread (brown), both expressed as a percentage. 3-month Treasury bonds are on the secondary market. Recession dates as defined by NBER are shaded from peak to trough in gray. Source: FRED, NBER and author’s calculations.
The data in Figure 2 are monthly averages of daily data. At this frequency, there will be a recession every 10 to 2 years, but no reversal in 10 to 3 months. On a daily frequency, however, double reversals always precede recessions (albeit only by a few days).
Then, a related question: Has there ever been a 10-2 year reversal while a 10-3 month spread was so large and positive?
image 3: 10-year-2-year Treasury spread (brown), 2-year-3-month spread (black), both expressed as a percentage. 3-month Treasury bonds are on the secondary market. Recession dates as defined by NBER are shaded from peak to trough in gray. Source: FRED, NBER and author’s calculations.
Such a combination is difficult to pin down before a recession.
