Following a 0.7% gain on Monday, US stocks are now down just 4% in 2022, paring a year-to-date loss of as much as 13% in mid-March. By contrast, bond markets continue to reflect mounting pessimism over the outlook for economic growth.
The spread between yields on 2-year and 10-year US Treasuries, a popular gauge of recession worries, has narrowed to just 6 basis points. A year ago this week, this part of the curve hit an intraday peak of 162 basis points. Investors often note that the 2/10 curve has inverted prior to each of the last 10 recessions. Other parts of the curve have already inverted, including 3/30 and 5/30.
In our view, the risk of an abrupt slowdown or recession has increased, along with the prospect of a swifter sequence of rate rises from the Federal Reserve and disruptions due to the war in Ukraine.
But we still view this as far from inevitable and believe interpreting the yield curve is more of an art than a science:
1. There is often a…