The Balance Today: News You Need To Know on Sept. 23, 2022

The Yield Curve Flashes Warning Signals as Recession Risks Rise

A woman looks at paperwork with a concerned face.

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As inflation continues to burn a hole in our wallets, the Federal Reserve keeps raising interest rates in an effort to curb prices. We’re not in a recession yet despite these signs, but we are “more likely than not” approaching one, according to a report released this morning by Wells Fargo economists. 

Although these economists believe we are not in a recession right now, they predict one could begin in the first quarter of 2023 and end in the fourth quarter of the same year. The Wells Fargo model, which is based on the latest inflation data from the Consumer Price Index and forecasts recessions a year ahead, has accurately predicted recessions since 1980. 

Treasury yields are also flashing a recession warning signal in the bond market, as a selloff sent yields surging to their highest levels in more than a decade and the yield curve inversion deepened. The yield curve, which compares the yields of short-term Treasury bills with long-term Treasury notes and bonds, is now the most inverted it’s been in at least two decades—this suggests investors are more pessimistic about the near future and is typically considered a leading indicator of a recession. 

Global government bond losses could be on course for their worst year since 1949 according to analysts at Bank of America, writing in a note this week that investor sentiment is “unquestionably” the worst it’s been since the 2008 financial crisis. We could also be in for a bumpy ride in the equity markets over the next few months, as the bank expects U.S. stocks have yet to reach their lowest levels this year. 

When the market is in a down cycle, it’s normal to feel anxious and want to sell before stocks fall further, but depending on your time horizon and risk tolerance, it might make more sense to wait out the market volatility, as selling too soon could lock in losses. 

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  1. Wells Fargo. "Gonna Change My Way of Thinking: Is Recession Coming?"

  2. Federal Reserve Economic Data. "10-Year Treasury Constant Maturity Minus 2-Year Treasury Constant Maturity."

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