Economics & Growth | Monetary Policy & Inflation | US
Recession Probability at 42%
- By Dalvir Mandara and Bilal Hafeez
- 2 min read
US treasury yields have eased somewhat. The yield on the 10y has been coming down since peaking at around 3.12% on 6 May. More recently, 10y yields have been flat on the week. Short-term yields have followed a similar trajectory, but they are still on the decline and are currently down 5bps over the past seven days. A combination of the two has caused a marginal increase in the slope of the 2s10s curve, which mechanically increases the probability of a recession.
Our recession model that uses the 2s10s curve as input is currently assigning a 42% chance of recession within the next twelve months – up 5pp from last week (Chart 1). Meanwhile, the Fed’s recession model, which uses the 3m10y part of the yield curve, gives just a 2% probability of recession (Chart 2).
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).
