10-year Treasury Yield and Odds of Recession

The chart of the 10-year U.S. Treasury Bond below shows that the yield has not broken below 4.40% for over one year.

Market watchers now believe that the 4.40% could be broken as the economy is showing inflation under control and longer term interest rates seem less likely to increase significantly. The ongoing flight-to-quality to short-term U.S. Treasuries has increased the spread between 90-day T-Bill yield and 10-year Treasury Bond yields back up to 75 basis points after narrowing to less than 10 basis points. The larger spread is thought to lower the odds of the U.S. economy entering a recession as witnessed by the model that the Federal Reserve Board’s Jonathan Wright in The Yield Curve and Predicting Recessions developed. In Wright’s model the chance of a recession has decreased from 32% to 13% based solely on the levels of the Treasury yields and the Federal Funds rate. Whether or not the spread between the shorter term and longer term Treasuries is a temporary and artificial effect of the mass dumping of mortgage-related securities, savings investors can find more incentive to purchase longer-term U.S. Treasuries and take advantage of the widened spread in yield.