There’s been a lot of commentary regarding the inversion of the US yield curve, specifically a negative 10yr-2yr spread. Here’s a graph depicting 10yr-2yr spreads (aka “2s10s”) for several economies.
Figure 1: Ten year minus two year spreads as of 4/1/2022, %. Source: WorldGovernmentBonds.com, accessed 4/2/2022.
Note that there is little cross-country research on the predictive power of this spread for recessions. Chinn & Kucko (2015) analyzes 10yr-3mo, Mehl (2014) investigates 5yr-3mo for emerging markets. Haubrich (2021) [ungated 2020 wp version] reviews some of the more recent cross-country evidence.
The Economist used to report the 10 year and 3 month rates in easy form, but stopped a while back (here’s my post from August 2019 noting the 10yr-3mo inversions). TradingEconomics.com reports 10 year and policy rates. Here’s a figure comparable to Figure 1.
Figure 2: Ten year minus policy rate spreads as of 4/1/2022, %. Source: TradingEconomics.com, accessed 4/2/2022, and author’s calculations.
What to make of these developments? A graph of recession probabilities for the United States from the 10yr-2yr and 10yr-Fedfunds (
bluered, teal, respectively) and for comparison 10yr-3mo ( redblue). is suggestive that we might not want to pay too much attention to the 2s10s (even if such inversions have preceded all the recessions for which we have data).
Figure 3: 12 month ahead estimated probability of recession using 10yr-3mo Treasury spread (blue), using 10yr-2yr spread (red), using 10yr-Fed funds (teal). NBER defined recession dates peak-to-trough shaded gray. Source: Treasury via FRED, NBER and author’s calculations.