Key Yield Curve Signal Shows US Recession Due As Soon As June

Authored by Simon White, Bloomberg macro strategist,

At least one key segment of the Treasuries yield curve suggests the US economy will enter a recession as early as June.

The spread between 3-month and 30-year yields — typically the first part of the curve to steepen before a recession — continues to widen.

This is a warning sign because inverted yield curves precede recessions, but it’s the re-steepening that signals the downturn is going to hit sooner rather than later.

Historically it is the 3m30y yield curve that has started steepening first before a recession, beginning to rise about five months before its onset. It began in mid-January, which would put a downturn starting as early as June. The spread between 3-month and 30-year yields is about minus 84 basis points, versus the January low of minus 115 basis points.

This time around, the rise in long-term yields is particularly troublesome because it suggests the bond market is beginning to price in structurally high inflation.

The closely watched 2s10s curve is still inverting, recently hitting a new low. But as the chart shows, 2s10s along with most other yield-curve segments, only begin to steepen just before the recession begins.