Investors ramp up recession bets as the Fed vows to keep battling inflation

• The bond market is ramping up its bet that the US will tip into a recession.
• The inversion between the 2- and 10-year Treasury yields widened to a full percentage point on Wednesday.

Bond market investors are ramping up their bets of an coming recession, thanks to the central bank vowing to stay hawkish on inflation.

The spread between the 2- and 10-year Treasury yields widened as much as a full percentage point on Wednesday, according to Federal Reserve data, marking the steepest inversion of that portion of the yield curve in over 40 years. By Thursday, the inversion eased back below a percentage point.

The inverted yield curve is a sign bond market investors are pricing in a serious chance of recession, making it a historically reliable indicator of a downturn.

The 2-year yield surpassed the 10-year-yield over a year ago, and similar inversions that stretched for more than several months correctly predicted the recessions of 1990, 2001, and 2008.

The latest move came shortly after Fed Chair Jerome Powell testified before Congress on Wednesday and reiterated that interest rates could tread higher later in the year. That's because the economy is running hotter than expected, he said, referring to strong jobs data and elevated inflation.

Central bankers have raised interest rates over 1,700% in the past year to get inflation back to its 2% goal. The fed funds rate is now at the highest level since 2007 — a level experts have warned could easily overtighten the economy into a downturn.

The New York Fed has estimated a 71% chance the US will tip into recession by May 2024, while Goldman Sachs has put the odds of a recession in the next 12 months at 25%.