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Motilal Oswal Report
With inflation posting a new high every month, the U.S. Federal Reserve is expected to hike the federal funds rate by another 75 basis points next week, though a 100 bps hike is not off the table.
While it has pushed the three-month yield on the Treasury Bill to 2.5% (from ~1.7% in mid-June 2022), the yield on the 10-year bonds has fallen below 3%, down from its recent peak of 3.5% a month ago.
Consequently, the spread between the two maturities (three months-10 years) has fallen to just 0.5% from 1.6% a month ago. The spread between the two-year and 10-year bonds has turned negative in July-22.
An analysis of all U.S. recessionary episodes since the mid-1960s suggests that the economy enters into a recession anytime between five and 16 months after 3M10Y spread turns negative, or between eight and 18 months after 2Y10Y spread (two-year yield available from CY76) turns negative.
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