Media Offers this is an Assured Recession Indicator

CAMS View from the Corner

March 4, 2025

Someone could probably make a living reviewing financial media and countering X views or conclusions with historical facts that point a penetrating light toward a different conclusion.  Such a counterpoint approach frankly should be unnecessary, but often is, in light of the initial reported point of view being off-base. 

To be fair, this is nothing new, narrative design, build-through, and then onto drumbeat dissemination is a way of socioeconomic life in our culture. 

For our part, it has become a way of professional life to see X views fitting the above description and then for us to simply move on with our work.  At times though, it is squarely in our wheelhouse of current-day focus, so we find it hard to let it pass.  

This is particularly true when a topic arises that generally fits the above scenario, of which we had thoughts of sharing within an edition but hesitated in light of its inherent complexity.  This scenario arose in recent days.

The short of it is we saw a media post offering that the Treasury 3-month yield curve was inverting again.  Such an inversion, they shared, was a reliable sign of an incoming recession.

In addition to our aforementioned hesitation on sharing this important data point, in light of its inherent complexity to most, our hesitation also developed from the fact that the indicator had not offered enough evidence that a recession was being forecasted by bond market participants. 

Allowing it to play out a bit made sense, which is an approach we often take, in particular relative to recession watch indicators.

We take this approach, born from experiential observation, via decades of operating in markets, whereby collective participants forecast a downstream expectation that fails to show up.  Yes, collective participants do get it wrong at times with their downstream messaging via their market operations. 

Said operations can offer various market setups that are nearly pounding the table of an incoming recession only to see time come and go without an actual economic setback.  As a follow-on setup then, various said market backdrops dial back into a “no inbound recession on the horizon” message mode. 

On a light note, this is kind of like an “our bad” message from collective participants as they reset the table if you will, upon realizing their previous expectations were incorrect.

Treasury Bond Market Participants’ Messaging

As a warning, we now enter a bit of bond market complexity. 

The good news is, outside of some contextual details, we have this drilled down to simple arrows and circle annotations to guide anyone through the market messaging from bond participants.

Okay, the 3-month Treasury inverted yield curve?  What?

To begin, yield curves simply plot the current yields (think interest rates) of bonds holding equal credit quality but having different maturities. 

Treasuries have equal credit quality as they all fall under the umbrella of the U.S. Treasury as the issuer.  Various maturities offer different yield levels (interest rates) typically speaking.  That is, for example, a 10-Year Treasury note is expected to offer a higher yield than say a 3-Month Treasury bill. 

In this normal storyline, if we were to chart the yields, as in a yield curve, the line would be upward rising.  This is a normal rising yield curve when charted. 

We can also think of this as a non-inverted yield curve.  That is, the longer maturity treasury instruments are offering a higher interest rate than the shorter maturity instruments.  This is as expected.

When bond market participants invert this yield curve, they are bidding up longer-maturity treasury securities and hence, decreasing their yields below the level of shorter-maturity treasury instruments.

With this, if the 10-Year Treasury note is now yielding 4%, while 3-Month Treasuries are yielding 4.25%, the curve inverts.  That is, the 3-Month Treasuries are now yielding more than the longer-maturity, 10-Year Treasury instruments.

For simplicity, we will steer clear of the many potential reasons for this development. 

A simple one offers said participants expect a slowing economy and react by bidding up longer-dated treasury instruments, which in turn lowers their yield.  An expected slowing economy does not mean an expected certain recession. 

In addition, they can expect a slowing in the growth rate of price inflation, which in turn can motivate their buying of longer dated treasuries as well. 

The bottom line, reduced to simplicity, is that when Treasury bond market participants push longer-maturity Treasury instrument yields below shorter-maturity yields, the yield curve moves from a normal upward slope to what is known as an inverted yield curve. 

This type of curve is abnormal and offers economic concerns.  It does not offer certain recession. 

This takes us to the reporting of a currently developing inversion process.  Per our observation of said reporting, this inversion attempt offers a high certainty of recession. 

Here is the pushback.  History solidly offers that a recession does not enter the scene when the curve inverts.  If a recession arrives, it comes on when the yield curve un-inverts from a previously inverted stance. With this, if you see inversion and immediately think, as X reporting has offered, that recession is certainly incoming, you may be disappointed in your prognostication.

Importantly, as proven in recent times, we experienced an inverted yield curve for a full two years, November 2022 – November 2024, and did not experience a recession.  Furthermore, the curve then un-inverted, albeit marginally, but no recession presented itself to date.

It was in this time period that we had been watching this indicator closely, but little corroborating evidence that a recession was incoming was presenting itself. 

Relying heavily on this one indicator, which many did dating back to late 2022 through 2023, can misguide an economic observer and market operator relative to their downstream expectations.  Corroboration of numerous inputs is always the essential ingredient.

Below, we move to our aforementioned, easy-to-understand annotated chart.

Click For Larger View:  https://fred.stlouisfed.org/graph/?g=1E6L7

The above chart dates back to the late 1980s for a broad perspective.  The line in the chart represents the difference between the yields of the 10-Year and the 3-Month Treasury instruments.  If the line is rising, it is labeled as an upward-sloping curve.  If the line is trending down, it is referred to as a downward-sloping curve.

Our focus in this edition is whether we are inverted or not. 

Our black horizontal line denotes a zero line. 

If the blue line moves below the black horizontal line (zero line), then bond market participants have inverted the curve, or inverted the spread as it is also often referred to.  In the above chart, this means 10-Year Treasury instruments are yielding less interest than the much shorter, 3-Month Treasury instruments.

Our red arrows depict the periods when inversion occurred.  For ease of reference, the shaded vertically highlighted areas depict official recessions.  Note how recessions did not enter the scene with the inversion but rather when it un-inverted. 

That is, when the blue line moved back up above the zero line (black line), recessions presented themselves, given time. 

The exception, thus far, is our recent experience up to the current day.  Our red circle highlights the historically long stretch of time whereby this indicator was inverted (under the black line) but no recession arrived.  In this case, this indicator has even un-inverted in recent months, and yet, no recession.  

For clarity, we must mention that a recession is two consecutive quarters of negative GDP growth. 

With our current narrative culture, rest assured this will now be shortened to one quarter of negative GDP growth.  The National Bureau of Economic Research (NBER) is the formal body that officially assigns the recession label on any time period.  The media is not awarded this distinction. 

If you hear in the media wind that the Treasury curve is inverting and it means an assured incoming recession, we offer, via the above historical relationship data, that you be careful with that suggested certainty from X media outlet.

One indicator never wins the day, especially relative to recession prognostications. 

We emphasize that corroboration from a plethora of inputs, from indicators to data releases, is a must if you desire to steer clear of imaginary incoming recessions.  For our part, we are extremely focused on this topic. 

As it stands currently, our forward-looking recession watch list is short but seemingly is trying to expand.  Currently, said list is too short to offer that a recession is imminent, but they can arrive quickly, which is why we are hyper-vigilant relative to our recession watch.

Importantly, lurking in the large background of all of this is what we have offered ad nauseam over recent years, and that is once immersed in a price inflation era, history offers a recession plays a role in ultimately putting an end to the inflation issue.  Will it be different this time?  We are watching closely.

I wish you well…

Ken Reinhart

Director, Market Research & Portfolio Analysis