The difference would be even narrower if not for the fact that interest rates can't fall below zero, the current low absolute level of yields and the relatively high volatility in bond markets, according to Bank of America. The bank's forecasting model removes these conditions, allowing it to better compare the current yield curve with that of past periods of slow economic growth.
Bank of America sees 10-year note yields at 2.3 percent by year-end, and two-year yields at 0.2 percent, according to data compiled by Bloomberg.
"The yield curve wouldn't really invert now due to technical reasons, mainly as most banks' models don't allow projections of interest rates in the future to be zero or below," said London-based Moorad Choudhry, head of business treasury, global banking and markets at Royal Bank of Scotland Group Plc in an interview on Oct. 4. "These are special circumstances, with the Fed's target rate at zero."
The Fed cut its benchmark rate to near zero in December 2008 after a housing boom turned into a subprime-mortgage bust, driving Lehman Brothers Holdings Inc. into bankruptcy three months earlier and freezing global credit markets. The economy slipped into a recession at that time that lasted 18 months before a recovery began.
Goldman Sachs Group Inc., another primary dealer, puts the odds of another recession at 40 percent, the firm's economists wrote in an Oct. 3 report. Goldman's fixed-income strategists reduced their year-end 10-year Treasury yield forecast to 2.7 percent from 3.1 percent.
JPMorgan Chase & Co. economists said in an Oct. 7 report that they see "a soft growth picture, but one that is not falling into recession at the moment." The firm, also a primary dealer, forecasts the 10-year note yield will end the year at 2.25 percent.
"We are in a world of lower growth expectations, but that said, the long end of the curve is actually too flat now relative to where it should be," said Srini Ramaswamy, a New York-based analyst on JPMorgan's fixed-income research team. "Given our models, which factor in our expectations for things including economic growth, we find the recent flattening of the yield curve as overdone," he said in an Oct. 4 telephone interview.
The difference in yields between 10- and 30-year Treasuries, the area Ramaswamy is referring to, was 93 basis points, down from this year's peak of 147 on Aug. 12. The 30- year yield plunged below 3 percent last month for the first time since 2009, before touching 3.06 percent today.
Three-month Treasury bill rates have topped 10-year yields eight times since 1960, with recessions following in six of those cases. There hasn't been a contraction that wasn't preceded by a so-called inverted curve in that period.
The three-month bill to 10-year note spread is at 212 basis points. Federal Reserve Bank of Cleveland researchers Joseph Haubrich and Margaret Jacobson wrote in a report posted on the bank's website on Sept. 30 that they estimate the chances of the economy's being in a recession next September is 7 percent, up from 4.8 percent in August and 1.7 percent in July.