US: Two years to the next recession? – Nordea Markets

Anders Svendsen, Research Analyst at Nordea Markets, suggests that the slope of the yield curve currently puts the next US recession around two years away – 15-28 months to be more precise.

Key Quotes

“The signals from the yield curve might be less reliable in the current monetary policy regime, which has caused a collapse in term premiums, but there is no evidence that this time is different. Markets will react to an inversion of the yield curve, which by itself tightens financial conditions and – on the margin – makes it more likely that the US will be heading for a recession. The Fed’s newly invented “near-term forward spread” puts the next recession furthest away.”

“Given that the yield curve has been the best single indicator for looming recessions in the past and given that there is no clear evidence that this time is indeed different, markets will fear yield-curve inversion, which will tighten financial conditions and – on the margin – make a recession more likely following an inverted yield curve.”

“Conclusion

The message from the yield curve is that the next US recession is looming. The flatter the yield curve, the higher the risk of a recession ahead and outright yield curve inversion would strongly increase the risk.

From an econometric point of view, the 10y Treasury yield less 3m T-bill is the one to watch and puts the next US recession 21 months away. The 10y swap rate less 3m Libor and the 10y – 2y Treasury yield spread put the next US recession 15-17 months away, while the Fed’s near-term forward spread puts it 28 months away.”