Research Brief: Financial Markets – July 2022

Possible recession predictor lit up this month. In early July, the spread between the two-year and 10-year treasuries inverted, with the yield on the shorter-term instrument inching above that of the long-term note. Typically, bonds with longer maturities pay a higher interest rate to compensate investors for the risk of holding those assets longer. When yields invert, it implies investors perceive more economic risk in the near future than down the line. Six of the past seven sustained inversions have preceded a recession by up to 23 months. As such, this most recent inversion has sparked concern for an impending economic downturn, especially as the Federal Reserve has been aggressively hiking interest rates to temper inflation. This assertive tightening, however, is distorting the treasury yields.

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