Economics & Growth | Monetary Policy & Inflation | US

The inversion of the 2s10s curve has deepened to levels last seen in 2006 prior to the GFC in response to another hot inflation print last week (9.1%). Short-end yields are outpacing long-end yields with 2Y yields up 47bps over the past week compared to 10Y yields which are down 1bp over the same period. Additionally, 3M yields are soaring – they are up over 100bps over the past 30 days. The odds of recession in our model rise with curve inversion.

Our recession model, which uses the 2Y10Y part of the yield curve, now assigns a 69% chance of recession within the next twelve months (Chart 1 and 3). That is up 9pp from last week. Meanwhile, the Fed’s recession model, which uses the 3M10Y part of the yield curve, produces a 14% 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.