of a looming recession is when the rates on short-term Treasury securities are higher than those of long-term Treasury bonds. And for the last several months, that’s exactly what we’ve had: short-term rates much higher than long-term rates. This usually means that a recession is coming soon.
In normal times, the Treasury Department must pay a higher interest rate for longer-term bonds to entice investors to lock their money into, say, a 10-year bond rather than a more flexible three-month or one-year security. But when investors expect a recession, they anticipate that the Federal Reserve will cut interest rates to try to stimulate the economy. This makes bondholders want to lock in long-term debt before rates—and bond yields—fall.
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