Yield Curve Sends US Recession WarningYieldCurveSendsUSRecessionWarning

With the eurozone projected to enter a recession this winter, one of the big questions facing the US economy heading into the new year is whether it also will formally enter a recession amid elevated inflation and higher rates. The bond market may offer a clue. An inverted yield curve – when yields on short-term Treasuries are higher than those on long-term bonds – is often considered a warning sign of a coming recession. Early this week, the two-year yield hovered about 65 basis points above the 10-year yield, suggesting that investors expect longer-term rates to be lower as the Federal Reserve eventually shifts into a more accommodative phase in support of a faltering economy. Interest rate futures are predicting an eventual rate-hike pause, followed by rate cuts, in 2023.

As rates rise and government debt reaches record levels, vulnerability to financial crises rises. PGIM’s OUTFront Series examines the potential for a crack-up in financial markets and where unknown fragilities could ultimately emerge.