For a record 446 days, this recession indicator pointed to a downturn that never arrived

One of the bond market’s most reliable signals of an impending U.S. recession remained inverted for the 446th straight trading session as of Monday — matching a record without producing any economic downturn.

The policy-sensitive 2-year Treasury yield BX:TMUBMUSD02Y has traded above the benchmark 10-year rate BX:TMUBMUSD10Y since July 5, 2022 — tying a record string of inversions last seen between Aug. 17, 1978, and May 1, 1980, according to Dow Jones Market Data, based on figures dating back to 1977.

Ordinarily, the Treasury curve slopes upward when the bond market is sending an optimistic economic signal, with near-term rates trading below their longer-term counterparts. Instead, the 2-year rate has remained higher than the 10-year yield because of a series of rate hikes by the Federal Reserve in 2022 and 2023 aimed at fighting inflation, followed by the possibility of rates staying higher for longer. This has inverted the difference between the two yields in what’s typically been regarded as a pessimistic outlook.

Now, a stream of stronger-than-expected U.S. data is upending conventional wisdom and pointing to something altogether different: an economy that could, surprisingly, dodge a contraction this year.

“We’re talking about a potentially false signal” being emitted by the 2-year/10-year spread, said Lawrence Gillum, the Charlotte, N.C.-based chief fixed-income strategist for broker-dealer LPL Financial. “The bond market likely got ahead of itself in pricing in a recession starting in 2022” and then followed the typical thinking that implied that the Federal Reserve would keep hiking interest rates until something broke, he said.

“The bigger story is that something that has a pretty high batting average in terms of predictability is not working this time,” Gillum said via phone.

According to research from the San Francisco Fed, it can take anywhere from six months to two years between the time the 2-year/10-year spread starts to invert and the beginning of a U.S. recession.

Nearly two-thirds of strategists polled by Reuters in March indicated that the 2-year/10-year spread is no longer reliable after having presaged almost every recession since 1955. It has provided at least one other false signal during that time.

Monday’s selloff in Treasurys lifted the 2-year rate to 4.935% and the 10-year yield to 4.627% — leaving the spread between the two at minus 30.8 basis points.