On Wednesday, the 10-year Treasury yield fell below the 3-month Treasury yield, producing an inverted yield curve — a pattern that has historically signaled elevated risk of a recession within 12 to 18 months.
The Federal Reserve Bank of New York tracks this relationship closely and issues monthly estimates of recession probability. At the end of January, that probability stood at about 23 percent, but the sharp change in the yield relationship in February is likely to push that estimate higher.
An inversion like this usually reflects investors’ expectations that the Federal Reserve will need to cut short-term interest rates in the future to offset weakening economic conditions. Although a previous inversion in October 2022 has not yet led to a recession after more than two years, market participants remain concerned that the strong growth projected under the current policy and economic agenda could encounter substantial headwinds.