Start the clock ticking. As of this morning, the 2 year T-bill is once again yielding less than the 10 year. The two year has been higher than the 10 year since July 5, 2022. If the chart turns convincingly green, there’s a 90% probability of a recession by next Summer–though we probably won’t officially call it until fall because of the backward looking data that officially define a recession.
If you’re totally lost, here’s a crash course. In a normally functioning economy, the longer the loan/investment term, the higher the interest rate/yield because that extra time carries extra risk that something ugly happens and the borrower can’t repay the loan on time. Consequently, an overnight loan would have a lower rate than a two year term, which would warrant a lower yield than a ten year term. But since the Fed’s jacked their overnight rate up so fast a few years ago, that naturally hiked up the shorter-term bond yields. The ten year fluctuates on market conditions more than Fed manipulation, so though it rose, it wasn’t nearly as much as the two year.
Consequently, the two year bond has been yielding more than the ten year for the last 26 months–until today. 90% of the time this phenomenon has happened over the last 74 year, a recession has started 6-8 months later. So now you know. One more thing, the FOMC’s rate is still 1.6% higher than the 2 year and that will also need to change. So my bet is that over the next 12 months, the Fed will cut at least 2.0% to get their overnight rate back down in the 3’s.
