Recession watch: Short-term yields rise, long-term rates fall

Heads up! A recession may be closer than you think. Here’s why: The yield curve is flattening right now.

As of March 14, 2022, the difference between short-term bond rates (e.g., the two-year Treasury) and long-term bond yields (e.g., the 10-year Treasury) was a mere 0.28%.

If the yield curve inverts, and short-term yields become higher than long-term rates, that’s a telltale sign a recession’s not far behind.

Current conditions breed recession?

Increasing rates for short-term bonds often means bondholders are anxious about the economy and its future. In times like these, investors may be less willing to bank on the better return from long-term bonds.

Despite the timing of this shift, it’s not necessarily directly related to the pandemic or the war between Russia and Ukraine, experts say. Though, those conditions are certainly contributing factors, especially considering recent price spikes of supplies and commodities.

Between expected interest rate hikes from the Federal Reserve and a natural economic slowdown that’s been brewing for months, along with skyrocketing energy prices, current conditions are rife for a recession.

The current saving grace is that the job market is healthy right now. Despite signs of slowdown, the economy is also generally strong.

However, as interest rates increase, the yield curve could shift even more. This could cause a slowdown in the job market and make a recession more likely. Stay tuned.