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Bond Market · Federal Reserve · Recession · Treasury Yield
David Stonehouse, Senior Vice-President and Head of North American and Specialty Investments at AGF Investments, highlights the two-year U.S. Treasury yield as a highly reliable indicator for forecasting the Federal Reserve's federal funds rate, the broader bond market's direction, and potential economic recessions.
Stonehouse's analysis, drawing on data since the 1980s and 1990s, demonstrates that the two-year yield consistently moves before the federal funds rate, signaling policy inflection points when they cross. A cross below the federal funds rate reliably indicates a shift from tight to easy monetary policy.
Furthermore, the two-year yield's convergence with the 10-year Treasury yield often marks market inflection points, with inversions signaling economic weakness and steepenings indicating recovery. Historically, peaks in the two-year yield precede recessions by 12 to 18 months.
Currently, Stonehouse observes a wide gap between the two-year yield and the federal funds rate, suggesting further rate hikes and continued upward pressure on two-year yields, making it premature to be bullish on bonds. However, the recent convergence of the two-year and 10-year yields, following an inversion since March, offers an encouraging hint of a potential end to the two-year-old bond bear market.
