Economics & Growth | Monetary Policy & Inflation | US
Recession Probability Exceeds 60% on Inverted Yield Curve
- By Dalvir Mandara and Bilal Hafeez
- 2 min read
This article is only available to Macro Hive subscribers. Sign-up to receive world-class macro analysis with a daily curated newsletter, podcast, original content from award-winning researchers, cross market strategy, equity insights, trade ideas, crypto flow frameworks, academic paper summaries, explanation and analysis of market-moving events, community investor chat room, and more.
The US 2s10s curve has inverted as investors digest hawkish Fed minutes from the June meeting. The rise in short-end yields continues to outpace that of the long-end, with 2Y yields up 62bps over the past 30 days compared to 33bps for the 10Y. The odds of recession in our model rise with curve inversion. Additionally, the latest forecast from the Atlanta Fed’s ‘GDPNow’ model (a model that aims to ‘nowcast’ GDP growth) estimates -1.2% growth for real GDP in the second quarter of 2022.
Our recession model, which uses the 2Y10Y part of the yield curve, currently assigns a 60% chance of recession within the next twelve months (Chart 1 and 3). That is up 3pp from last week. Meanwhile, the Fed’s recession model, which uses the 3M10Y part of the yield curve, produces a 7% chance of recession (Chart 2).
Background to Models
We introduced two models for predicting US recessions using the slope of the US 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. Our model is based on the 2s10s curve compared to a model from the Fed that is based on 3M10Y curve. We believe that the 2Y better captures expectations for Fed hikes in coming years and is therefore more forward-looking.
