December 5, 2014

How Close is a Recession?

The following chart shows the spread between 10yr and 2yr US Treasuries as a proxy for the slope of the US yield curve.

As you can see below, historically the yield curve flattens and turns negative in advance of recessions (shaded areas). (This is because the long-term rates are a reflection of anticipated future short-term rates, and short-term rates fall during recessions.)

Takeaway: the current spread between 10yr and 2yr US Treasuries indicates a historically steep yield curve, suggesting the US is still a long way from the next recession.