Eggs are displayed for sale in a Manhattan grocery store on Feb. 25, 2025 in New York City.
Spencer Platt | Getty Images
An ominous measure that the Federal Reserve considers a near sure-fire recession signal again has reared its head in the bond market.
The 10-year Treasury yield passed below that of the 3-month note in trading Wednesday. In market lingo, that’s known as an “inverted yield curve,” and it’s had a sterling prediction record over a 12- to 18-month timeframe for downturns going back decades.
In fact, the New York Fed considers it such a reliable indicator that it offers monthly updates on the relationship along with percentage odds on a recession occurring over the next 12 months.
At the end of January, when the 10-year yield was about 0.31 percentage point clear of the 3-month, the probability was just 23%. However, that is almost certain to change as the relationship has shifted dramatically in February.
10-year 3-month curve
“This is what one would expect if investors are adopting a much more risk-averse attitude set of behavior due to a growth scare, which one periodically sees late in business cycles,” said Joseph Brusuelas, chief economist at RSM. “It’s not clear yet whether it’s more noise or it’s a signal that we’re going to see a more pronounced slowdown in economic activity.”
Though markets more closely follow the relationship between the 10- and 2-year notes, the Fed prefers measuring against the 3-month as it is more sensitive to movements in the central bank’s federal funds rate. The 10-year/2-year spread has held modestly positive, though it also has flattened considerably in recent weeks.
10-year 2-year yield curve
To be sure, yield curve inversions have had a strong but not perfect forecasting history. In fact, the previous inversion happened in October 2022, and there’s still been no recession 2½ years later.
So while there’s no certainty that growth will turn negative this time around, investors worry that expected growth from an ambitious agenda under President Donald Trump may not happen.
Economic obstacles arising
The 10-year yield soared following the Nov. 5, 2024 presidential election, building on gains that began when Trump moved higher in the polls in September and peaking about a week before the Jan. 20 inauguration. That would normally be a tell-tale sign of investors expecting more growth, though some market pros saw it also as an expression of worries over inflation and the extra yield investors were demanding from government paper amid a mounting debt and deficit issue for the U.S. government.
Since Trump took office last month, yields have tumbled. The 10-year has fallen about some 32 basis points, or 0.32 percentage point, since the inauguration as investors worry that Trump’s tariff-focused trade agenda could spike inflation and slow growth. The benchmark yield is now essentially unchanged from Election Day.
10-year yield
“There are quite a number of little potholes in the roadway that we really need to navigate around,” said Tom Porcelli, chief U.S. economist at PGIM Fixed Income. “What’s happening is all the uncertainty around the tariffs in particular is putting a very high-powered magnifying glass over all those cracks. People are starting to perk up and pay attention to this now.”
Recent sentiment surveys have reflected consumer and investor angst over prospects that growth could slow as inflation perks up just as it appeared to be easing.
In the University of Michigan’s monthly survey, respondents put their longer-term view on inflation, over the next five years, at its highest level since 1995. On Tuesday, the Conference Board reported that its forward-looking expectations index had sunk back down to levels consistent with recession in February.
Still, most of the “hard” economic data such as consumer and labor market indicators have held positive even in the face of downbeat sentiment.
“We are not looking for a recession,” Porcelli said. “We don’t expect one. We do, however, expect softer economic activity in the coming year.”
Markets are coming around to the same view of weaker activity as well.
In response, traders are now pricing in at least a half percentage point of interest rate cuts this year from the Fed, an implication that the central bank will ease as growth slows, according to the CME Group’s FedWatch measure of futures prices. The bond market smells “recession in the air,” said Chris Rupkey, chief economist at FWDBONDS.
However, Rupkey also said he’s not sure whether a recession will actually happen, since the labor market isn’t yet signaling that one is coming.
The yield curve inversion “is a pure play on the economy being not as strong as people thought it was going to be at the beginning of the Trump administration,” he said. “Whether or not we’re forecasting a full-blown recession, I don’t know. You need job losses for a recession, so we’re missing one key point of the data.”
Bank of England Governor Andrew Bailey attends the central bank’s Monetary Policy Report press conference at the Bank of England, in the City of London, on May 8, 2025.
Carlos Jasso | Afp | Getty Images
Bank of England Governor Andrew Bailey told CNBC on Thursday that the U.K. was heading for more economic uncertainty, despite the country being the first to strike a trade agreement with the U.S. under President Donald Trump’s controversial tariff regime.
“The tariff and trade situation has injected more uncertainty into the situation… There’s more uncertainty now than there was in the past,” Bailey told CNBC in an interview.
“A U.K.-U.S. trade agreement is very welcome in that sense, very welcome. But the U.K. is a very open economy,” he continued.
That means that the impact from tariffs on the U.K. economy comes not just from its own trade relationship with Washington, but also from those of the U.S. and the rest of the world, he said.
“I hope that what we’re seeing on the U.K.-U.S. trade side will be the first of many, and it will be repeated by a whole series of trade agreements, but we have to see that happen of course, and where it actually ends up.”
“Because, of course, we are looking at tariff levels that are probably higher than they were beforehand.”
In Bank of England’s Monetary Policy Report released Thursday, the word “uncertainty” was used 41 times across its 97 pages, up from 36 times in February, according to a CNBC tally.
The U.K. central bank cut interest rates by a quarter percentage point on Thursday, taking its key rate to 4.25%. The decision was highly divided among the seven members of its Monetary Policy Committee, with five voting for the 25 basis point cut, two voting to hold rates and two voting to reduce by a larger 50 basis points.
Bailey said that while some analysts had perceived the rate decision as more hawkish than expected — in other words, leaning toward holding rates elevated than slashing them rapidly — he was not surprised by the close vote.
“What it reflects is that there are two sides, there are risks on both sides here,” he told CNBC.
“We could get a much more severe weakness of demand than we were expecting, that could then pass through to a weaker outlook for inflation than we were expecting.”
“There’s a risk on the other side that we could get some combination of more persistence in the inflation effects that are gradually working their way through the system,” such as in wages and energy, while “supply capacity in the economy is weaker,” he said.
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