Economics & Growth | Monetary Policy & Inflation | US
Recession Probability Stays Near 80% on Soaring Yields
- By Dalvir Mandara and Bilal Hafeez
- 2 min read
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US Treasury yields rose on Friday after a volatile week as Federal Reserve (Fed) speakers remained Hawkish. The 10Y yield reached almost 4% on Tuesday before closing the week at around 3.8%. The 2Y yield breached 4.3% on Tuesday and closed the week at around 4.2%. 2Y yields continue to outpace that of the 10Y with the former up 100bps over the past month compared to 95bps for the latter. The –40bps which has kept recession probabilities
Our recession model, which uses the 2Y10Y part of the yield curve, now assigns a 77% chance of a recession within the next twelve months (Charts 1 and 3). It has been signalling at least a 70% chance of recession consistently since 13 September. Meanwhile, the Fed’s recession model, which uses the 3M10Y part of the yield curve, produces just a 15% chance of recession (Chart 2). The probability of recession increases with yield curve inversion.
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 the 3M10Y curve. We believe that the 2Y better captures expectations for Fed hikes in coming years and is, therefore, more forward-looking.
