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Investing.com -- This week, a key recession indicator favored by the Federal Reserve has shown a rapid decline, similar to the rate seen in 2008. This is viewed as the latest indication that bond investors are preparing for a significant economic slowdown due to the broad tariffs imposed by U.S. President Donald Trump.
The difference between two-year and 10-year Treasury yields, a measure often favored in the bond market, is not the preferred indicator for Fed Chair Jerome Powell. Instead, Powell is reported to prefer the spread between the yield on three-month Treasury bills and their expected yield in 18 months. This specific spread is believed to better reflect near-term rate expectations compared to the gap between two-year and 10-year Treasuries.
When there is a risk of recession, this spread tends to narrow and can even become negative. This phenomenon occurred following the Fed’s rate-hiking cycle that began in March 2022, which turned the spread negative and maintained it in that state due to high yields on T-bills.
On Friday, this spread reached minus 113 basis points, the most negative it has been since last October. Notably, it is on track for its largest single-day increase since the end of 2008, a period marked by the global financial crisis that significantly disrupted markets.
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