"Wall Street's US Economic Recession Indicators, Do They No Longer Work?"

'Inversion of Short- and Long-Term Treasury Yields No Longer Signals Recession'
US Economy Shows Strong Growth Despite Longest Duration on Record

The long-standing Wall Street formula that a recession follows when U.S. long- and short-term Treasury yields invert is breaking down. Despite the trend of the 10-year Treasury yield, a long-term bond, remaining below the 2-year yield, a short-term bond, for the longest period on record, U.S. economic growth is still confirmed to be robust.

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The daily Wall Street Journal (WSJ) reported this on the 28th (local time) in an article titled "Wall Street's preferred recession indicator is itself in recession." On that day in the New York bond market, the 10-year yield stood at around 4.56%, below the 2-year yield (around 4.98%) and the 3-month yield (around 5.38%). The inversion between the 10-year and 2-year yields has persisted since early July 2022.

WSJ described it as the "longest inversion in history," stating, "The Treasury yield inversion has long been considered an almost certain signal that a recession is approaching. But now its continuity is under threat."

Currently, the U.S. economy is assessed as robust. Economic growth is expected in the second quarter, and the labor market remains solid with more than 175,000 new jobs added last month. The S&P 500 index, centered on large-cap stocks in the New York stock market, rose 24% last year and has continued a double-digit rally this year. UBS raised its year-end target for the S&P 500 index from 5400 to 5600 on the same day. The earnings per share forecast for S&P 500 listed companies this year was also raised to $245. These are all typically regarded as signs of economic recovery.

Ed Hyman, chairman of Evercore ISI, said, "(The recession formula) is not working," and assessed, "So far, the economy is fine." However, he also added that the possibility of a delayed recession cannot be ruled out.

The reason why the long-standing inversion of long- and short-term Treasury yields has been interpreted as a precursor to recession inside and outside Wall Street is clear. For long-term bonds with longer maturities, yields tend to fall below short-term yields when investors expect the Federal Reserve (Fed) to cut interest rates. Rate cuts are measures taken to stimulate the economy during difficult times.

In all eight previous instances of yield curve inversion, a recession followed. Since 1968, when the 10-year yield falls below the 1-year yield for at least a month, the time until a recession materializes has been estimated to be between 9 and 24 months.

One of the first to highlight the correlation between long- and short-term Treasury yield inversion and U.S. economic growth in 1986 was Professor Campbell Harvey of Duke University. However, this time even Professor Harvey says the inversion is no longer serving as a leading indicator of recession, indicating a decline in its reliability as a recession signal.

Professor Harvey pointed out, "It is naive to believe that the complex U.S. economy can be predicted by a single bond market indicator." He had previously drawn a cautious line around recession possibilities due to yield curve inversion at the end of 2022, stating, "The situation is different." At that time, recession forecasts were spreading due to the Fed's aggressive tightening.

Some argue that recent indicators have slowed more than expected, suggesting that the recession is merely delayed. However, many experts view a soft landing that lowers inflation without recession as the more likely scenario. Michael Lorizio, chief bond trader at Manulife, said, "The early-cycle inversion had a significant impact on investor sentiment, but now it has become a kind of new normal."

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