Economics & Growth | Monetary Policy & Inflation | US
Recession Probability Over 60% on Inverted Yield Curve
- By Dalvir Mandara and Bilal Hafeez
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- 2 min read
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The 2s10s yield curve has inverted for the first time since 2019 with the 10y yield (2.38%) now 6bps below the 2y yield (2.44%). Meanwhile, 3m yields remain well below the 10y with current Fed policy rates still low. Our recession model that uses 2s10s curve as the input is now assigning a 62% probability of recession within the next 12 months. This is the highest assigned probability since prior to the Global Financial Crisis in 2008 and is comparable to the highest probabilities assigned during the pandemic. Meanwhile, the Fed’s recession model, which uses the 3m10y part of the yield curve, is only assigning a 2% probability of recession.
Background to Models
We introduced two models for predicting US recessions using the slope of the yield curve. When long-term yields start to fall towards or below short-term yields, the curve flattens or inverts. This has often predicted a recession in subsequent months. One model from the Fed is based on the 3m10y curve and the second is our modified version based on the 2y10y curve. The two-year would better capture expectations for Fed hikes in coming years. It is therefore more forward-looking. So, our preferred yield curve is the 2y10y curve (10-year yields minus two-year yields).
