Recession Risk is Growing

Written by Staff Writer

Alligator BirdsGovernment Bond-Market Measure Says Recession Risk GrowingWall Street Journal
"The yield on short-term Treasurys has been higher than on long-term notes for more than 30 consecutive trading sessions, a sign that investors are concerned about the durability of the decadelong economic expansion. The yield on three-month bills has exceeded that of the benchmark 10-year Treasury note by as much as 0.259 percentage point, the most since May 2007, before the financial crisis. Shorter-term bill yields tend to reflect expectations for Federal Reserve interest-rate policy, while those on longer-term securities move largely with expectations for growth and inflation.

Investors watch the dispersion between yields on short- and longer-term Treasurys, known as the yield curve, because shorter-term yields tend to exceed longer-term ones before recessions. Investors call that a phenomenon an inverted yield curve. Two different financial models used by the Federal Reserve Banks of New York and Cleveland each show that the probability of a recession in the next 12 months has risen to about 1 in 3, odds last reached in 2007....Investors remain divided about whether an inverted yield curve is signaling a downturn is coming. One reason is recent upbeat data, such as Friday’s jobs report for June, which showed the U.S. added more jobs than economists had forecast. Another is that the Fed has indicated possible rate cuts, which could lower borrowing costs for consumers and businesses, potentially stimulating more growth and investment."