Numerous articles mention the possibility of a recession [1] [2]. This is the evolution of the 10-year to 3-month and 10-year to 2-year term spreads in the months leading up to the past four recessions.
figure 1: The 10-month-three-month Treasury spread (blue) and the 10-year-two-year Treasury spread (brown), expressed as a percentage. NBER defines the recession date. Source: Treasury via FRED, NBER and author’s calculations.
figure 2: The 10-month-three-month Treasury spread (blue) and the 10-year-two-year Treasury spread (brown), expressed as a percentage. NBER defines the recession date. Source: Treasury via FRED, NBER and author’s calculations.
image 3: The 10-month-three-month Treasury spread (blue) and the 10-year-two-year Treasury spread (brown), expressed as a percentage. NBER defines the recession date. Source: Treasury via FRED, NBER and author’s calculations.
Figure 4: The 10-month-three-month Treasury spread (blue) and the 10-year-two-year Treasury spread (brown), expressed as a percentage. NBER defines the recession date. Source: Treasury via FRED, NBER and author’s calculations.
We don’t know when the next recession will start, but we do know where are the spreads as of today? As shown in Figure 4 below.
Figure 5: The 10-month-three-month Treasury spread (blue) and the 10-year-two-year Treasury spread (brown), expressed as a percentage. NBER defines the recession date. Source: Treasury via FRED, NBER and author’s calculations.
While the 10-year to 2-year spread is declining rapidly, the 10-year to 3-month spread remains at non-alarm levels.
Torsten Slok pointed out that the sharp rise in gasoline prices heralded a recession.
resource: Torsten Slok/Apollo, March 5, 2022.
As for inflation expectations, the 5-year inflation breakeven point shows an upward trend. However, adjusting for estimated real and liquidity premiums suggests that inflation is not expected to accelerate (at least until the end of February).
Image 6: Five-year Treasury yield minus five-year TIPS yield (blue) and five-year expected inflation rate (brown) Source: Treasury via FRED, Kim, Walsh & Wei (2019) Follow D’amico, Kim, and Wei (DKW) on March 7, 2022, and the author’s calculations.
Despite concerns that rising commodity prices will bring higher inflationary pressures, the market is implying that short-term interest rates have fallen for the next 2-3 months.
Figure 7: One-month Treasury yields (turquoise), and implied yields for the next 2-3 months (yellow-green) in %. NBER defines the recession date. Source: Treasury via FRED, NBER and author’s calculations.
