Fed's 12-Month Recession Probability Soars To Levels Unseen Since 1982

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The likelihood of a recession in the United States within the next year has risen to almost 58%, the highest level since August 1982, according to the New York Federal Reserve.

The recession-risk indicator is now greater than it was in November 2007, just before the subprime-Lehman crisis, when it stood at 40%, and December 2001, when it was at 46%.

The New York Federal Reserve's model uses the yield curve's slope, or "term spread," to predict a U.S. recession twelve months ahead. The term spread used by the New York Fed refers to the gap in yields between the 10-year Treasury bond and the 3-month bill.

When yields on shorter-term bonds are higher than yields on longer-term bonds, the yield curve is considered inverted.

An inverted yield curve has reliably predicted each of the previous eight U.S. recessions since 1970.

When a yield curve is inverted, investors fear that the current high level of interest rates, reflected in elevated shorter-term yields, will push the economy into a recession, causing the central bank to cut interest rates in the future, thus discounting presently lower longer-term yields. This is why an inverted yield curve is often a precursor to a recession.

The SPDR Bloomberg 1-3 Month T-Bill ETF (ARCA: BIL), is a popular ETF which offers exposure to the ultrashort end of the Treasury curve, investing in zero coupon U.S. T-Bills with less than three months until maturity.

The iShares 7-10 Year Treasury Bond ETF (ARCA: IEF), instead offers exposure to Treasury bonds with seven to 10 years to maturity.

Treasury Yield Curve Inversion: Where Are We Now?

In March, the term spread was negative 1.15%, as 10-year rates were around 3.5% and 3-month yields were around 4.65%. The 10-year-3-month yield differential has further worsened to a negative 1.6% at the time of writing, with the 3-month yield jumping to 5.2% and the 10-year yield trading at 3.6%.

If such a spread holds or expands further in April, then the next month's New York Fed recession probability indicator will likely become even more negative than its previous assessment of a 57.8% chance of a recession occurring before March 2024.