Inverted Curves and Recession Signals

  • With the yield curve flat as a pancake across its belly, investors are wondering if the near inversion of the curve spells a coming recession. While the 2yr-10yr Treasury spread is still 21bps away from inverting, the trend is definitely going in that direction. While the 2yr – 10yr Treasury spread is probably the most quoted as a recession indicator, it does throw off false signals from time to time. The old joke is that the 2yr – 10yr Treasury going inverted has called ten of the last five recessions.


  • Is there a spread relationship that is a little more reliable, and one that the Fed leans on more when setting monetary policy? The answer to that is yes. That spread is the 18 month forward 3mo TBill rate vs. the current 3mo TBill rate. The graph is below. It’s a little more esoteric but it essentially looks at where the market thinks the 3mo TBill rate will be in 18 months compared to the current 3mo rate. As the graph shows, the market thinks 3mo TBill rates will soar over the coming 18 months indicating a Fed that is raising rates, but also with a fairly strong economy that can withstand those rate hikes. The Fed would view that current spread as yet another indication that plenty of rate hikes can be employed without tipping the economy into a recession.


18mo Forward 3mo TBill vs. Current 3mo TBill
  • Other recession predictors, like the New York Fed’s Recession Probability Indicator, have been flatlining of late, indicating no uptick in recession odds. The Fed and investors will be watching this as we move through rate hikes this year, but for now most indicators say the Fed has plenty of bandwidth to hike before the economy falters.


  • That’s all well and good about the economy, but what does any of this tell us about when yields, particularly longer-term yields, start to plateau. Well, no one knows for sure but one indicator I’ve trotted out in the past is the Copper/Gold Ratio vs. 10yr Treasury yields. The idea behind it is that copper is used in so much of the modern-day economy such that when its price rises, it’s an indication of an expanding global economy. On the other hand, gold is often bought in times of uncertainty, as a safe haven investment, when the economic picture is less certain. Thus, an expanding economy, and thus a higher copper/gold ratio, typically leads to higher rates. As the graph below shows, the 10yr yield does track pretty closely the copper/gold ratio. The yield did lag the latest uptick in the ratio but it’s making up for lost time  now. Given the current ratio, the 10yr Treasury yield might be expected to  move up to the 2.50% to 2.75% range, but a move to 3.00% is certainly not out of the question. But it does look like the bulk of the climb in yields has mostly been accomplished.
Copper/Gold Ratio vs. 10yr Treasury Yield
  • Finally, I want to mention that our latest podcast is out and has yours truly along with Robert Biggs and Geetika Bansal from our Duncan Williams Strategies Group. We discuss the Fed, the outlook on rates along with some investment strategies in a rising rate environment. The links are below.


Listen on iTunes:

Listen on Spotify:

Listen on Google Podcasts:


Agency Indications — FNMA / FHLMC Callable Rates

Maturity (yrs) 2 Year 3 Year 4 Year 5 Year 10 Year 15 Year
0.25 2.15 2.43 2.53 2.68 2.92 3.37
0.50 2.14 2.40 2.47 2.57 2.78 3.26
1.00 2.14 2.37 2.44 2.53 2.68 3.14
2.00 2.36 2.38 2.45 2.57 NA
3.00 2.40 2.50 NA
4.00 2.45 NA
5.00 2.42 NA
10.00 NA

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Published: 03/23/22 Author: Thomas R. Fitzgerald