The 2-10 Yield Curve Inversion Recession Signal is the Strongest in Over 40 Years

November 23, 2022

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12:01 am

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57 comments

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Economics

*Data from US Treasury, calculation and chart by Mish*

Chart Synopsis

There was no 30-year long bond issuance in the yellow highlighted interval.
The 10-year to 3-month inversion is 64 basis points, the deepest since January of 2001.
The 30-year to 3-month inversion is 57 basis points, the deepest since November of 2000.
The 10-year to 2-year inversion is 71 basis points, the steepest since October 1981 (see chart below).

10-Year Minus 2-Year Treasury Yield

*Chart and spread via St. Louis Fed, annotations by Mish*

Never before have we seen such strong inversions except right before or in recessions.

It will not be different this time. A recession is on the way, assuming it’s not already started.

Existing Home Sales Decline 9th Month, Down Another 5.9 Percent

Existing home sales from the National Association of Realtors via St. Louis Fed

On November 18, I commented Existing Home Sales Decline 9th Month, Down Another 5.9 Percent

Existing Home Sales Crash

Existing home sales are down 28.4% from one year ago.
Existing home sales are down 31.7% since January.

That’s a crash. And never have we seen such declines other than in recessions.

California Faces a $25 Billion Budget Problem With Ongoing Deficits

Please note California is spending like the tech boom would last forever. Ahead of Recession, California Faces a $25 Billion Budget Problem With Ongoing Deficits

Governor Newsom is unofficially running for president in 2024. It will be official the day president Joe Biden announces he will not run for reelection.

Had Democrats retained the House, free money bailouts to California, Illinois, New York, New Jersey, etc., would have been massive.

Huge Layoffs Including Thousands at Amazon and FedEx in Peak Shipping Season

Finally, please note Huge Layoffs Including Thousands at Amazon and FedEx in Peak Shipping Season

Amazon, Facebook, Redfin, FedEx, Stripe, Twitter and tech companies in general are all laying off workers.

Not to worry, Biden says there is no recession and the economy is strong. Not only is it different this time, it’s very different this time.

This post originated at MishTalk.Com.

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vanderlyn

1 year ago

SHADOWSTATS DAILY UPDATE –- November 22nd to 28th [Updated November 22nd, 11:00 p.m. ET -– IN THE NEWS: MONEY SUPPLY IS DRIVING THE SURGE IN INFLATION, DESPITE SOFTENING ANNUAL GROWTH: October 2022 “Basic M1” Money Supply (Currency plus Checking Accounts), held 120.3% above its Pre-Pandemic Trough, minimally off peak, also holding at a 52-year high level of systemic liquidity, having absorbed and held the equivalent of 23-years of normal Monetary Stimulus in the 2.8 years since the Pandemic Shutdown. Even the headline Aggregate Money Supply M2 has absorbed 14-years of normal stimulus. Given that extreme, inflation bloating cannot pass easily, without some meaningful reduction in Money Supply, well beyond just slowing money growth.

Exacerbating circumstances, excessive Federal Government Spending and the resulting Federal Debt Outstanding are at all-time highs, excessively bloated, pushing against the Debt Ceiling. Now that the Administration has backed off playing its pre-Election inflation games with oil prices, watch for continuing, excessive headline inflation to resume its upside surge in the months ahead, with the U.S. Economy increasingly sacked by FOMC rate hikes. Previously discussed here, FOMC rate hikes aimed at curtailing inflation in an overheating economy do little of the kind, if the economy is not overheating (the current circumstance). Continuing rate hikes will only pummel further an already moribund economy, also previously discussed.

Salmo Trutta

1 year ago

Reply to vanderlyn

Neither Shadow Stats nor Divisia Aggregates uses the correct distributed lag effects.

vanderlyn

1 year ago

Reply to Salmo Trutta

and YOU know who has this so called correct distributed lag affects? shadow stats is as good as anything out there, to keep the yard stick, a stick, and not a rubber band of changing measurements………this is a gigantic inflationary cycle thanks to century busting printing press to combat the world wide plague shutdown. we’ll see the affects of that last many years, imho.

vanderlyn

1 year ago

i don’t think the conventional methods of only 40 years are worth spit, when we haven’t had the beginning of a rising rate environment in over 50 years of late 60s……. imho. perhaps i’m wrong. but it’s more like Covid lock down ending after world shut down for 2 years, and immense printing press, is more akin to post ww2 inflationary period. jobs still very tight. misery index is only one half bad, thank heavens.

Salmo Trutta

1 year ago

Demand Deposits (DEMDEPNS) | FRED | St. Louis Fed (stlouisfed.org)

Preliminary, DDs roc:

07/1/2022 ,,,,, 0.088

08/1/2022 ,,,,, 0.124

09/1/2022 ,,,,, 0.072

10/1/2022 ,,,,, 0.069

11/1/2022 ,,,,, 0.087

12/1/2022 ,,,,, 0.091

01/1/2023 ,,,,, 0.097

02/1/2023 ,,,,, 0.094

03/1/2023 ,,,,, 0.101

04/1/2023 ,,,,, 0.128

That’s still called stagflation, business stagnation accompanied by inflation.

Lisa_Hooker

1 year ago

Reply to Salmo Trutta

Good to see that we have such precise figures for next March and April.

Prediction is hard, especially about the future.

Salmo Trutta

1 year ago

Reply to Lisa_Hooker

You’ve been duped. Economic prognostications were infallible for one year when legal reserves were enforced. The FED’s monetary transmission mechanism was required reserves, the truistic monetary base. An increase in the currency component was contractionary.

It looks more like a blowoff in Jan. Depends on how Xmas spending goes. Any way you can see the trend. It conforms to Atlanta gDp now and Cleveland’s inflation forecast.

Salmo Trutta

1 year ago

M2 hasn’t changed for c. 1 year. But DDs have risen. So, the “demand for money” has fallen, and thus velocity has risen. So, short-term money flows are rising at the same time long-term money flows are falling. Until short-term money flows reverse, a recession will not happen.

09/1/2021 ,,,,, 20957.9

10/1/2021 ,,,,, 21098.0

11/1/2021 ,,,,, 21334.5

12/1/2021 ,,,,, 21660.4

01/1/2022 ,,,,, 21636.9

02/1/2022 ,,,,, 21590.5

03/1/2022 ,,,,, 21855.8

04/1/2022 ,,,,, 21860.3

05/1/2022 ,,,,, 21555.1

06/1/2022 ,,,,, 21585.8

07/1/2022 ,,,,, 21578.9

08/1/2022 ,,,,, 21546.5

09/1/2022 ,,,,, 21459.4

10/1/2022 ,,,,, 21362.5

Salmo Trutta

1 year ago

Great presentation:

(84) Quantitative Easing Is the Biggest Sham Ever (S3 E2) – YouTube

How QE, the opposite of QT, affects the stock market.

Bam_Man

1 year ago

Reply to Salmo Trutta

Bernanke claimed that QE was “just an asset swap”.

Yeah, right.

Swap your nearly worthless, illiquid assets at full book value for highly liquid, risk free, interest-bearing assets (deposit reserves)

Nice deal.

worleyeoe

1 year ago

Unemployment claims rise to 240K after spending most of the year in the low 200’s or even below 200K in some months.

Now, let’s get that number up to 275K be January 1 and see if we can reach 300K by the end of February.

Then we can really talk about a slowing economy. The only way inflation gets tackled is for housing to bust at least 25% and unemployment rises up to 5% and stays there into June 2024. We’re only in about the bottom of the 2nd inning here, IMHO.

Then, we get to see if JPowell can put on his big, boy Volcker pants and if Congress will try act on renewed rent & mortgage relief rather than letting markets determine winners and losers.

I’d expect JPowell to cave as will Congress, including RINO Republicans in the House. MMT or bust!

xbizo

1 year ago

Some really good thoughts here. In agreement that the curve inversion is not a cause. Agree that tech layoffs and high priced housing is a toxic mix to watch, as is rising variable interest rates on second mortgages. Tech unemployment should also be negatively affected by venture capital pullback on their zombie companies. We are in a cycle where they allow them to fail and save their powder for the next round. Then there’s fallout from the FTX theft, not sure what could chain react off of it. We already have inflation lowering retail revenue so we know future quarterly reports are going to be disappointing.

What is not in play yet is debt rollover to higher rates. Corps still enjoying low debt payments.

Small industrial companies are being helped by the tech layoffs and did surprisingly well into the third quarter. A number of competitors have quit their markets leaving the remainder to pick up share and pricing. They probably come off their peak revenues and drop some in 2023, but still really healthy. Some twice the revenue of 2019.

Real estate vacancy appears to have bottomed.

Recession may be for some sectors but not others.

worleyeoe

1 year ago

Reply to xbizo

“What is not in play yet is debt rollover to higher rates.”

FYI – FY2022 total interest on the national debt increased dramatically from ~ $550B to $718B. And that’s just from 6 months dramatically rising rates that started in early March 2022. For example, the 3YT was at 1% at the beginning of the calendar year, 1/1/2022, then only increased to 1.438% by 3/1 but then spiked to $4.38% at the end of FY2022. FY 2023 will easily push past $850B. By the end of FY2024, we MAY be looking at interest expense approaching $1T.

You can monitor the aggregate total using this URL. Set the pivot table to 1Y, Chart, Expense Category & finally Fiscal Expense Year to Date Amount.

link to fiscaldata.treasury.gov

xbizo

1 year ago

Reply to worleyeoe

Yes, wasn’t thinking about the government debt, but corporate debt. Higher interest payments by the government actually mitigate the economic downturn, putting money back into the economy. It’s inflationary instead of recessionary.

worleyeoe

1 year ago

Reply to xbizo

Ah! I would suspect that the NET effect of higher interest rates on corporate debt most likely lags by 12-18 months. Also, I think this time around corporate bottom lines, in general, came into this rate hike cycle quite healthy, so it may take at least 18 months to start to hit corporation’s bottom lines, putting that in late 2023. It’s hard to predict rate hikes in terms of net gains or losses by investors & corporations. I would imagine that it mostly cancels things out, except for those really well-run companies that don’t borrow much. For the zombie companies, I would imagine 2023 is going to be an extremely difficult year.

Tony Bennett

1 year ago

Reply to xbizo

“Real estate vacancy appears to have bottomed.”

…

2 things

1) Per Census Bureau rising from 2021 … from albeit low number.

Table 1

link to census.gov

2) Put me down for 2023 will see a flood of “investor” properties (AirBnB owners going broke) hitting the market.

worleyeoe

1 year ago

Reply to Tony Bennett

One can only hope! Go JPowell. You in large part created the asset bubbles, so you need to own it and break it, dude!

MarkraD

1 year ago

It’s worth noting that inversions coincide with rate hikes. – link to fred.stlouisfed.org

Also worth noting this hike is occurring as a result of excess growth causing inflation.

My only concern is whether or not the Fed knows to time softening before it becomes a reverse problem down the road, policy has a latency of between 1.5 to 2 years and we’re already seeing effects after 8 months.

This is similar to steering the helm of a large ship in a cross current, the ship is slow to react so it’s common for new sailors to oversteer, causing a wild series of left/right reactions to stabilize direction, often forcing an experienced helmsman to step in.

RonJ

1 year ago

“The 2-10 Yield Curve Inversion Recession Signal is the Strongest in Over 40 Years”

Must be FTX that did the trick. A side order of Lehman, please, and a slice of LTCM for dessert.

DoctorFuture

1 year ago

Mish,

Thank you for all your selfless, hard work.

I hear a lot of talk about the average time duration that a bond inversion precedes a recession, but is there any typical average duration of time (or range) that the inversion stays in place, before “un-inverting”? Thanks!

Tony Bennett

1 year ago

Reply to DoctorFuture

Likely a moving target.

Department of Treasury plays key role by issuance of debt along the curve. Average maturity has been increasing.

June latest figure.

June 2021 … 62 months

June 2022 … 68 months

DoctorFuture

1 year ago

Reply to Tony Bennett

Thank you for your considerate response, my fellow Bennett.

As a neophyte, I am not sure I understand your response – are you suggesting the numbers you share are the gap in maturity at a given time before the inversion disappears? Sorry about my ignorance. If I was unclear, I am wondering what history says is the average length of time a 2 and 10 year bond remains inverted during such periods, and particularly in historical economic scenarios comparable to our own today (if such exists). You may have answered by question as I intended it (as a highly variable “moving target”), but I was too unlearned to recognize it.

Tony Bennett

1 year ago

30 year bond yield inverted with 30 day bill yield.

8dots

1 year ago

The Real M1 rose between Jan 2020 to Jan 2022 from 1.5T to 7.3T, building a bubble. Creepto was rising like a hawk, using the hot air of the dollars liquidity and trading rooms FOMO to rise above the cliff. But when liquidity was drained, they dived like a hawk to hunt Gen Z, millennial and Sam Bank/Madoff with the rest of his swamp friends.

The Fed pay attention to rates, not to M1. They use liquidity drainage to fight inflation. But what if the Fed cannot control it, it’s too fast for them.

Tony Bennett

1 year ago

Reply to 8dots

M1 down to $6.7 trillion (October).

“They use liquidity drainage to fight inflation. But what if the Fed cannot control it, it’s too fast for them.”

…

Inflation?

Try again.

Disinflation / deflation will be watch words for 2023 … as job / credit losses pile up.

The most note worthy (imo) number reported this week: German PPI (October month over month)

prior (Sept) … +2.3%

expected … +0.9%

actual … -4.2%

Salmo Trutta

1 year ago

Reply to Tony Bennett

The Germans have a problem with economics. Just read Sheila Bair’s book: “Bull By the Horn’s”

The ECB guaranteed a lot more bank-holding company debt than the FDIC. That
destroyed money velocity over and above that in the U.S.

worleyeoe

1 year ago

HP is now saying they’re going to layoff 6,000 employees over the next 2 years. Let’s see if the timeline moves up in about 6 months. It’s about that time of the year for IBM to make its announcement. Google is laying off 10K.

mrbridger

1 year ago

The Fed clearly has an opportunity to accelerate QT and to sell down its holdings of longer dated bonds across the yield curve thereby slowing the economy while slightly moderating the rate rises. On the other hand this inversion is a life line to corporates who are being gifted a last chance to lock in their longer dated funding before rates go much higher. Fed has been managing the dollar, the curve and volatility like a true expert. Optics are everything.

worleyeoe

1 year ago

Reply to mrbridger

The Fed is very unlikely to accelerate its runoff by selling treasuries. It’s more likely that, if 30YFRM falls and in January the Fed struggles to meet its $37B MBS runoff, they MAY start selling MBS which will push up mortgage rates. QT is draining liquidity from the markets, albeit slowly. The RRF peaked at $2.425T back at the end of Sept and is now down ~ $300B. By next March, it may be closing in on $1.5T which may start to cause issues for the market. Personally, I don’t see it making it down to $1T which would probably take until late next year.

Also, IMO this is the one-off time that yield curve inversion just isn’t as strong of an indicator of an impending recession or at least how severe it will be.

MarkraD

1 year ago

The Fed did explicitly say rates were raised in part to cool off the overheated real estate market and labor shortages.

Now there’s a fire in the theater because R/E is slowing, man, if JOTS comes in slower it might mean it’s the biblical end of days.

Six000mileyear

1 year ago

My credit union is offering 3.5% for an 18 month CD. I’m taking the plunge. That yield is not too far from that of a 10 year US Bond. There is less duration risk. When it matures, the recession should be over and time to buy stocks near cycle lows.

On the other hand… (one arm economists wanted) Inflation could be very tame but interest rates very high. A wave of defaults in the bond market would demand a risk premium as the economy seizes up.

shamrock

1 year ago

Reply to Six000mileyear

That’s not a very good deal, you can get 4.5% on 12 month CDs.

Hottub

1 year ago

Reply to shamrock

Where can you get that rate?

whirlaway

1 year ago

Reply to Hottub

Barclays US Bank for example. 3.97% for 18 months. link to banking.barclaysus.com

worleyeoe

1 year ago

Reply to shamrock

I just bought a 3-year brokered CD from Fidelity last week @ 4.9% with call protection. I would strongly urge you to move your money out of the credit union and into a quality brokerage account with Fidelity or CSchwab. I can get a 1-year Morgan Stanley brokered CD @ 4.75% with call protection.

whirlaway

1 year ago

Reply to worleyeoe

That’s a good deal. Plus, if the stock and debt markets collapse say halfway and the Fed drastically cuts short term rates, you could sell the brokered CDs at a small premium and look for bargains in the stock market.

Zardoz

1 year ago

Reply to Six000mileyear

I’m getting 3.25 on a savings account

Zardoz

1 year ago

Americans love a hairdo, and Biden’s isn’t cutting it. Newsom’s magnificent plumage could beat down DeSantis AND Trump’s scruffy wigs at the same time. Bow before the hair!

MarkraD

1 year ago

Reply to Zardoz

Matt Gaetz?

Zardoz

1 year ago

Reply to MarkraD

The hair is good, but the face is creepy.

worleyeoe

1 year ago

Reply to Zardoz

Fortunately, a hair contest is all Newsom can win. Good luck with him in 2024.

Zardoz

1 year ago

Reply to worleyeoe

So much certainty, so little knowledge.

Business Man

1 year ago

Reply to Zardoz

I remember the campaign of John Kerry and John Edwards in 2004. John Edwards said, “We have better hair” in the typical vacuous Democrat appeal to vanity.

They lost.

vanderlyn

1 year ago

Reply to Business Man

those of you kids still in the D v R pom pom squad cheering have been divided and conquered by your betters of the ruling class. old old story

Sunriver

1 year ago

Record high public debt. GDP and consumer expenditures certain to fall. Fully expect federal deficits north of $2 trillion per year for like, ever.

Mish, You’re right on tech layoffs. They are coming fast as venture capital is no longer there to prop up zombie corporations. I have friends who work for these type of companies and layoffs are being announced.

I keep thinking about people who bought into $3,000 mortgages and $800 6 year car payments over the last couple of years. I have no idea how they are going to keep current.

Sadly, reposessions will pick up.

Pepsi Anyone?

Zardoz

1 year ago

Reply to Sunriver

Nickels are being shat. There are at least a few thousand people in the ‘bought Bay Area real estate at the absolute peak, then got laid off’ boat.

JackWebb

1 year ago

Reply to Sunriver

I have made plenty of mistakes, some pretty serious. But here’s one I did NOT make: failure to save. I have ZERO sympathy for the highly-paid techies who failed to save. None whatsoever. How much do you want to bet that these are the same California Bay Area liberals who signed onto the excoriation of anyone who’s white and making 1/10th or less than they do?

vanderlyn

1 year ago

Reply to JackWebb

ha ha ha. worrying about techies in 2022 is silly. those fellas are resilient and have great skills. can work remotely for thousands of world wide companies…………….i’d worry about the homeless and un schooled folks. tomorrow’s factories all gonna require college degrees to work in.

whirlaway

1 year ago

Reply to Sunriver

$3,000 mortgages in Bay Area? Those were the days! Now, it is more like $7000 to $8000 during the last 3-4 years.

And don’t forget to add the property tax of $2,500 or so…. per month!

desertsteve

1 year ago

Reply to whirlaway

Nothing better than paying that mortgage and those taxes to walk out your front door to the homeless and the dump one of them took the day before. The only way its gonna get fixed is The Big One, dropping the whole thing into the ocean.

Zardoz

1 year ago

Reply to desertsteve

Ah, the happy dreams of the patriot, full of American cities being destroyed.

Business Man

1 year ago

Reply to Zardoz

He didn’t say he wanted that.

So how will it get fixed? Liberals have the answer to everything, so I’d love to hear this one.

This city has been run by hardcore Leftists for a very, very long time. Do they accept responsibility for these failures?

That was what desertsteve was getting at, that if Leftists and their voters refuse to acknowledge their policy failures, nothing will fix it other than some huge catastrophe that will force their hand. This isn’t hard to figure out.

MarkraD

1 year ago

Reply to Business Man

More trickle-down, just cut taxes for the wealthy, state it “creates jobs”, then when the jobs are created in China, Mexico and India, give the homeless cheap loans and the Fed will just cut rates, again and again and again….

vanderlyn

1 year ago

Reply to Business Man

you have been divided and conquered by your betters. i’d suggest opening eyes.

Business Man

1 year ago

Reply to vanderlyn

Uh huh.

Bam_Man

1 year ago

Reply to desertsteve

Bingo.

The “Big One” is what is needed to return CA real estate to some semblance of reality.

What do you think SF real estate was worth in 1907?

“Not much” is my guess.

vanderlyn

1 year ago

Reply to Bam_Man

more hate mongering. my old hometown for a decade, of charleston SC the boys used to say if you want a charming city, start a revoluition and get thoroughly destroyed. poor for another century. then you got antique town to sell to yankees.

The 2-10 Yield Curve Inversion Recession Signal is the Strongest in Over 40 Years

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