The likelihood of a recession in the United States within the next year has risen to almost 58%, the highest level since August 1982,according to the New York Federal Reserve.

The recession-risk indicator is now greater than it was in November 2007, just before the subprime-Lehman crisis, when it stood at 40%, and December 2001, when it was at 46%.

Chart: Probability of U.S. Recession Twelve Month Ahead

Source: Federal Reserve Bank of New York

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The Bond Yield Curve Slope As Recession Predictor

The New York Federal Reserve's model uses the yield curve's slope, or "term spread," to predict a U.S. recession twelve months ahead. The term spread used by the New YorkFed refers to the gap in yields betweenthe 10-year Treasury bond and the 3-month bill.

When yields on shorter-term bonds are higher than yields on longer-term bonds, the yield curve is consideredinverted.

An inverted yield curve has reliably predicted each of the previous eight U.S. recessions since 1970.

Chart: Treasury Yield CurveSlope 10y Bond YieldMinus 3-Month Bill Yield; Shaded AreasIndicate U.S. Recessions Source: Federal Reserve Bank of New York

Why Does an Inverted Yield Curve Indicate a Recession?
When a yield curve is inverted, investors fearthat the current high level of interest rates, reflected in elevated shorter-term yields, will push the economy into a recession, causing the central bank to cut interest rates in the future, thus discounting presently lower longer-term yields. This is why an inverted yield curve is often a precursor to a recession.

The SPDR Bloomberg 1-3 Month T-Bill ETF BIL , is a popular ETF which offers exposure to the ultrashort end of the Treasurycurve, investing in zero coupon U.S. T-Bills with less than three months until maturity.

TheiShares 7-10 Year Treasury Bond ETFIEF , instead offers exposure to Treasury bondswith seven to 10 years to maturity.

Treasury Yield Curve Inversion: Where Are We Now?

In March, the term spread was negative 1.15%, as10-year rates werearound 3.5% and 3-month yields werearound 4.65%. The 10-year-3-month yield differential has furtherworsened to a negative 1.6% at the time of writing, with the 3-month yield jumping to 5.2% and the 10-year yield trading at 3.6%.

If such a spreadholds or expands further in April, then the next month'sNew York Fedrecession probability indicator will likely become evenmore negative than its previous assessment of a 57.8% chance of a recession occurring before March 2024.

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