Monitoring Recession Signals

As the U.S. economy faces growing uncertainties, Sevens Research analysts highlighted two critical “smart market” signals that investors should monitor to gauge the likelihood of an impending recession.

The firm said in a note to clients Wednesday that these signals are rooted in the behavior of the Treasury yield curve, a key economic indicator.

Key Indicators

10-Year vs. 2-Year Treasury Note Yield Spread

The first signal is the 10-Year Treasury Note to 2-Year Treasury Note yield spread, a widely followed metric that often predicts economic downturns. According to Sevens Research, when this spread reverts from negative to positive after a prolonged inversion, it historically precedes market downturns, as seen in 2000 and 2007. The firm says this reversion process is currently in motion, making it a crucial indicator to watch.

10-Year vs. 3-Month Treasury Bill Yield Spread

However, Sevens Research points out that a lesser-known but historically more reliable indicator is the 10-Year Treasury Note to 3-Month Treasury Bill yield spread. They explain that this spread typically remains inverted longer than the 10Y-2Y spread and signals a more imminent recession when it turns positive.

The analysts note that while the 10Y-2Y spread is nearing positive territory, the 10Y-3M spread has deepened its inversion, which suggests that a recession could still be on the horizon.

Yield Curve Trends

Additionally, the direction and cause of yield curve movements are seen as vital. A “Bull Steepening” trend, where short-term yields fall faster than long-term yields, signals economic concerns and dovish Fed policy expectations—precursors to potential rate cuts. Conversely, a “Bear Steepening” trend, where long-term yields rise faster than short-term ones, could indicate a soft landing.

As Sevens Research concludes, “Bull Steepening trends across the yield curve and the 10Y-3M yield curve spread turning positive are two recession warning signals from the ‘smart market’ that warrant monitoring in the weeks and months ahead.