Every Part of Treasury Curve Is Now Flashing Recession Warnings

The Treasury market is signaling that a recession is all but inevitable, if history is any guide.

(Bloomberg) — The Treasury market is signaling that a recession is all but inevitable, if history is any guide.

As concerns about the financial health of the US banking sector mount, benchmark yields on every maturity of Treasury — from three-month T-bills to 30-year bonds — have fallen below 4.75%, the upper end of the Federal Reserve’s range for its key benchmark rate.

Since 1977, such a move has foreshadowed every economic downturn, according to data compiled by Bloomberg. Its predictive powers were off only once in 1998, when the Fed slashed rates after the collapse of hedge fund Long Term Capital Management but a recession never materialized.

The steep drop in Treasury yields reflects speculation that the failure of Silicon Valley Bank and two other lenders may hasten the end of the Fed’s rate hikes amid concern about spreading contagion. Two-year yields fell 54 basis points Monday, the biggest drop since Black Friday in 1987, when the S&P 500 tumbled 21%.

Swap traders are betting that the Fed is likely to pause its rate hikes at the March 22 meeting. Earlier last week, they saw a half-percentage-point rate increase as the most likely scenario.

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