A Recession in 2022 Looks Increasingly Likely As More Yield Curve Inversions Appear

March 30, 2022

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12:30 pm

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Yield Curve data from the New York Fed as of 2022-03-29, yellow highlights mark Inversions, chart by Mish

The highly watched 2-10 spread was positive 6 basis point (2.41 minus 2.35) as of the close on March 29 having briefly inverted (negative) intraday.

Yield Curve Spreads Since January 2021

*Yield Curve data from the New York Fed as of 2022-03-29, chart and calculations by Mish*

About a year ago the 2-10 spread was 159 basis points and is now just 6 basis points.

Yield Curve Spreads Since January 2022

Six Inversions

20-Year to 30-Year: 15 Basis Points
7-Year to 10-Year: 9 Basis Points
5-Year to 10-Year: 8 Basis Points
5-Year to 3-Year: 5 Basis Points
3-Year to 10-Year: 13 Basis Points
3-Year to 30-Year: 1 Basis Point

Inversions (shorter-duration bonds yielding more than longer-duration bonds) are a sign of a weakening economy and a recession.

The most widely watched recession harbinger is the 2-10 spread which briefly inverted intraday on March 29 but finishing the day at a positive 6 basis points.

Recession Coming

A recession is on the way. The only question is whether it hits in 2022 or 2023.

The answer to the question “when?” depends on how fast the the Fed hikes and how resilient the housing and stock market bubbles are to Fed hikes.

2022 is looking increasingly likely.

Meanwhile the housing bubble keeps expanding while the stock market shrugs off the expected hikes.

For more on housing, please see 2021 Set New Annual Records for Home Prices. 2022 Continues the Trend.

This post originated on MishTalk.Com.

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35 Comments

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oee

2 years ago

The economy added + 431000 jobs in March. I do see recession. The economy would be reducing the number jobs created by now and other indicators would point to it.

TCW

2 years ago

“It’s very dangerous to use prior inverted yield curves to predict a recession: expert”

link to finance.yahoo.com

Cocoa

2 years ago

Fed has no control over long rates and can just twiddle the shorter dated stuff. The FED follows, makes a gesture of .25 to pretend they have control

KidHorn

2 years ago

Reply to Cocoa

Why can’t the FED buy up a bunch of debt maturing in 10+ years and send the yield down.

Mish

2 years ago

Reply to KidHorn

They did in QE but it probably amounted to something like 40 basis points.

Recall the debate I got in with a Fed QE trader who said the Fed wanted to steepen the curve,

I am struggling with how they do that without causing major disruptions somewhere.

Scooot

2 years ago

Reply to Mish

“I am struggling with how they do that without causing major disruptions somewhere.”

I think they’d try to do it by just staying offered at a certain yield rather than hitting bids. That way they’d prevent the yields from falling but wouldn’t aggressively push them up. In reality, once the market knew there was a floor they’d go up anyway as they’d be no point in speculating against them. No sign of them doing this at the moment though, still flattening/inverting.

StukiMoi

2 years ago

Reply to Cocoa

Not sure exactly how someone who can print arbitrary amounts of USD into existence cost free, say 10 quadrillion tomorrow, could somehow NOT have control over prices of things in USD. That would require some rather hallucinogenic supply/demand analysis….

Back down here, on planet More-traditional-supply/demand-effects: The Fed’s limitation, is only one of maintaining appearances: They want their captives to remain solidly anchored to the illusion that prices are set, according to mechanisms which retain at least some traits of “free market” ones. Rather than being as full-stop arbitrary as they really are.

Printing enough to fully “control” long rates makes that illusion much harder to maintain. MOST OF THE TIME. That’s why The Fed, most of the time, holds back a little bit. Key modifier being: Most of the time. As something The Fed’s client classes can get away with branding a “crisis” emerges; then it’s off to the races. Then, The Fed can, and of course hence does, take just as arbitrary control over long rates as they more normally do over short rates. After all, once the dupes hear the magic spell “crises,” not to mention the even more powerful one “The System Will Collapse”; they can then be told that that truly scary hobgoblin named “Market Failure” will come eat their first born. Once that bout of spellcasting has been being accomplished, The Fed can then print just as much as it feels like, and hand the resulting loot to its connected clients (who, after all, are who “The System…” refers to). Since then, the dupes will be temporarily scared into no longer minding that what they sheepishly and stupidly believe has something in common with a “free market”, is not so free for awhile.

The important point being: The only constraint on The Fed effectively controlling ANY term Dollar rate, is simply a self imposed one. Self imposed in order to maintain the currently fashionable illusion that current capital/wealth allocation is done by some sort of “free market.” Since that illusion has proven to serve The Fed’s client class so singularly well: Enriching them orders of magnitude beyond their sub mediocre talents. And: With those robbed to provide the required loot, cheering for the looting to continue, even.

The Fed is in no way a slave to some “market.” Heck, trivially so; since there can be no meaningful “market” absent some level of scarcity of ALL the goods traded on it. And there obviously is no scarcity of something one or more parties can simply create, as much as they want to, out of thin air, entirely cost free.

FooFooFed

2 years ago

Can anybody explain why the RRP was at 30 basis points and the 4 wk TBill was almost half that last week? Are market players chasing best collateral in anticipation of liquidity challenges? Funny, I asked several brokerages this question, all series 7 lic., and nobody had any idea how the plumbing works! NOBODY! Greenspank told congress when the yield curve inverted it was a conundrum. Berdinky said housing was fine. Old Yellern said never a recession ever again. Seems like the only thing they have in their playbook is psychology, and the lemmings are reassured so easily.

Tony Bennett

2 years ago

Reply to FooFooFed

The 30 bps on RRP is what the Federal Reserve has stated it will pay to eligible counterparties. The 1 month T bill at the mercy of global market forces.

A hand out for Wall Street (at taxpayer’s expense). Imagine that.

FooFooFed

2 years ago

Reply to Tony Bennett

Yep. But why were players buying much much more 4 week TBills than going for the RRP? RRP is overnight window right? But again way hang onto 4week TBill. Must be a collateral quality issue right? Risk has increased. Don’t want to be last guy holding the bag.

Tony Bennett

2 years ago

Reply to FooFooFed

Federal Reserve capped at $160 billion the most any counterparty could do (per day).

FooFooFed

2 years ago

Reply to Tony Bennett

Ive seen a Security Lent to Dealers chart that shows there’s always a spike when the shite hits the fan. Prior to GFC this data hardly ever moved, now over last 12 years seems to be volatile. Jeff Snider talks about it here….link to youtube.com

Dean_70

2 years ago

This is the reason the fed only raised .25, they see the writing on the wall. They would rather deal with inflationary pressure than a deflationary spiral.

Tony Bennett

2 years ago

Reply to Dean_70

Powell’s back against the wall. POTUS has said it is the job of Federal Reserve to get inflation under control. Powell has been nominated by POTUS for second term as Chairman, but not yet confirmed by Senate. Any Senator who votes affirmative (as long as inflation raging) will face voter backlash … especially, any Senator up for re-election in midterm.

vanderlyn

2 years ago

love this stuff. you nailed the bubble bust back in the panic of 2007/8. keep it up. much obliged.

shamrock

2 years ago

Reply to vanderlyn

Isn’t that like thanking the broken clock for nailing the time of day yesterday at 1:45? I appreciate most of the posts on mishtalk but predicting the direction of any asset class has not been a strong suit. It’s the same prediction all the time: stocks and real estate down, gold up.

P.S., it’s 2022, where’s my self driving car?

vanderlyn

2 years ago

Reply to shamrock

mish stood out in 2006…………as seeing the bubble bursting into a panic. not many did.

Mr. Purple

2 years ago

Reply to shamrock

In San Francisco and Phoenix apparently.

link to ktla.com

IIRC, Mish had a range of around 2024 before mass rollout. Still on track for that.

shamrock

2 years ago

Reply to Mr. Purple

Waymo started in Phoenix 5 years ago, there has been no change since then. San Francisco is still “months away”, the same status it’s had for years. So lets say they become truly operationally in San Fran this year, that’s a rollout of 1 city in 5 years, that’s hardly the pace required for a mass rollout.

Mr. Purple

2 years ago

Reply to shamrock

Paces also accelerate. Point is, it’s inevitable.

shamrock

2 years ago

Reply to Mr. Purple

“As I have commented many times, my expected timeframe for driverless to kick off is 2020 or 2021.”

from link to mishtalk.com

He was always mocking us “naysayers” that said it would take 10 years or more to get from the testing phase to mass adoption.

Casual_Observer2020

2 years ago

Just my hunch but I think Russia may fire a nuclear weapon sometime this year. Putin has gone into his bunker with generals. The recession stuff is going to look pale in comparison.

Tony Bennett

2 years ago

“A Recession in 2022 Looks Increasingly Likely”

…

Yes. And it will be global.

China slowing. Japan flat lining. Europe …

Growth running on fumes of fading stimulus.

Everything currently more or less orderly … that will change … “something” will happen (likely offshore) to get chaos ball rolling (China devaluing?).

Casual_Observer2020

2 years ago

Reply to Tony Bennett

And it has been needed. We never allowed banks to capitulate from the last cycle.

Tony Bennett

2 years ago

Reply to Casual_Observer2020

Yes!

I was adamantly against TARP (USG could have taken worst offender(s) into receivership … and done it in orderly fashion … without sending country back to the Stone Ages). But if they were to do it absolutely necessary to break up TBTF banks (Kaufman Amendment to Frank – Dodd would have capped balance sheets to 2% of US GDP. Of course, failed) and prosecuted a few bankers from Primary Dealers.

Nutshell – everyone bailed out and no one to jail. Lesson learned. Do whatever necessary to get huge bonuses.

When it finally all falls apart (again) … even I will be shocked by the extent of shady (fraudulent) activity that will be uncovered.

MountainMan

2 years ago

Reply to Tony Bennett

The question is: Who will come out of this on top?

Sunriver

2 years ago

Fall 2022 is my guess at when recession takes hold.

Prices this summer will be horrific for ‘everything’ and will cause a Y.U.G.E. suppression on demand for consumer discretionary!

A big thank you to the FED for causing the ‘Everything Bubble’!

Real people with Real hardships is coming right up.

Not sure who will be charged to ‘clean up’ the ‘BidenVilles’, but McArthur is no longer available. Saddle up boys, this is going to get interesting.

MPO45

2 years ago

Recession? And yet private employment up 425k.

link to finance.yahoo.com

At some point we all need to contemplate if there is indeed a new reality or as people here prefer “this time it *really* is different.” If there is a new reality then we need a new playbook. While classic economic theory will state something like “inversions usually precede recessions” those theories were based on somewhat sane economic policies and theory.

What do we do when we have endless printing, QE, off balance sheet transactions, marked to fantasy accounting, Fed seizures of foreign sovereign funds, and other Loki deception or Fed scam of the week?

Paul T.

2 years ago

GDP is a bogus number, does not include debt.

vanderlyn

2 years ago

Reply to Paul T.

but does include .GOV spending. agree 100% with you. GDP is grifter number.

KidHorn

2 years ago

The problem with predicting a recession is the BEA can report whatever they want for GDP. It’s not like it’s actually measured. It’s a guess filled with assumptions. If there’s political pressure for no recession, they’ll figure out a way to report small positive growth. No matter what. Maybe they’ll revise it months later, but at that point, no one will care.

I personally think our GDP is inflated compared to other countries. China has 4x the US population. They produce everything they use and export a lot while we import a lot. They build way more structures than we do. And somehow our GDP is bigger than theirs? I don’t buy it.

Tony Bennett

2 years ago

Reply to KidHorn

Not only are “current” economic numbers based on historical activity (in some cases months prior) … they face multiple revisions. Inflection points particularly tricky. Ex: BEA initial GDP report for Q1 2008 … +0.6% … revisions over the next few months increased it to as high as +1.0% … FINAL number … YEARS later … -2.3%.

Maximus_Minimus

2 years ago

Reply to KidHorn

GDP is a band aid because the economic gurus couldn’t figure out anything better.

They also said that digging holes and filling them up is great for the economy…and war is the best.

If you chop down the forests, or fish out the ocean, it’s also great.

You’ve got the picture of the intellectual quality there.

Mr. Purple

2 years ago

Reply to KidHorn

What do we call an unfalsifiable belief system like economics? Starts with an R.

jfpersona1

2 years ago

Reply to Mr. Purple

Reaganomics?

A Recession in 2022 Looks Increasingly Likely As More Yield Curve Inversions Appear

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