According to BlockBeats, on September 10, DataTrek co-founder Nicholas Colas said that the shift in the long-term expected relationship between 2-year and 10-year Treasury yields was not the only recession warning from the bond market last Friday. The sharp drop in the 2-year Treasury yield pushed the spread between short-term notes and the federal funds rate to the most negative level in at least 50 years. Colas pointed out that the spread between the two short-term interest rates fell below -1% only three times, and each time this happened, a recession began within a year.
However, Colas does not think this will necessarily lead to a recession. He said a recession needs a catalyst to start, and so far, nothing has happened in the U.S. that could trigger such a sharp economic slowdown. Instead, the inversion shows that bond traders are increasingly concerned that the Federal Reserve is not reducing borrowing costs in a timely manner amid a slowing labor market. "The bond market is saying that the Fed is well behind the curve in terms of rate cuts," Colas said in a report on Monday.