The bond market is notorious for being a harbinger of doom, and according to Bank of America strategists, the yield curve is signaling that a recession could be looming on the horizon. This classic recession indicator has flashed signs of an incoming downturn for months, and the analysts believe that the recession could start this quarter.
The yield curve inversion between the 2-year and 10-year yields and the 3-month and 10-year yields is a highly-watched signal of an incoming recession. Short-term yields surpassing long-term yields have correctly predicted the recessions of 1990, 2001, and 2008. Historically, a recession kicks off six months after the inversion of the 2-10 year curve, and given that those bond yields inverted in November of last year, the recession could be arriving in May.
The 2-10 year yield curve recently notched its deepest inversion in over 40 years, and the inversion steepened in March as the collapse of Silicon Valley Bank unfolded. The analysts believe that this move is a major omen for the US economy. Meanwhile, the spread on the 3-month and 10-year yields have "barely" steepened, but if the inversion between those treasury yields were to deepen in the following weeks, that would be a strong indicator that a recession is starting in the second quarter.
Central bankers raised interest rates over 1,700% to tame high inflation, and experts say that rates that high could easily push the economy into a downturn, particularly as Fed officials have signaled rates are likely to remain higher for longer. High rates are expected to continue weighing on employment and corporate earnings, which spells trouble for stocks. Though equities are pricing in just a 4% decline to corporate earnings, there's risk that firms could face bigger headwinds amid higher rates and a recession on the horizon.
In conclusion, the bond market's notorious recession indicator is flashing signs of an incoming downturn, and Bank of America strategists believe that a recession could start this quarter. The inversion of the 2-year and 10-year yields and the 3-month and 10-year yields are highly-watched signals of an incoming recession, and historically, a recession kicks off six months after the inversion of the 2-10 year curve. High interest rates, which have been raised to tame high inflation, are expected to continue weighing on employment and corporate earnings, which spells trouble for stocks.
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