Yield Curve vs Leading Economic Index

10Y-2Y spread: ~+31bp (April 2026, 10Y 4.31% minus 2Y 4.00%). Positive (re-steepened). Compares to peak inversion -110bp July 2023 (highest since 1981).

LEI six-month change: -1.3% (through January 2026, latest pre-shutdown). Improvement from -2.6% (January-July 2025) and -7.6% (early 2024).

Both indicators flashed major recession warnings 2022-2024. April 2026: both in process of normalization without recession arriving.

The combined April 2026 reading: both classic recession indicators false-positive in this cycle. Yield curve inversion 24 months (longest in modern history) without recession. LEI decline 24 consecutive months without recession. Sahm Rule triggered July 2024 + 21+ months without recession.

All three traditional recession indicators (yield curve + LEI + Sahm Rule) gave false signals 2022-2026. Most divergent setup in modern history. Cross-asset markets price soft landing.

Yield curve trajectory: 2022-2023 inversion peaked -110bp July 2023. Inversion duration 24 months (July 2022 - mid-2024). 2024-2026 re-steepening: from -110bp to +31bp (140bp re-steepening).

LEI trajectory: peaked early 2022 at ~120 (1992=100). Declined ~16% peak-to-current (April 2026 ~101). Six-month annualized: peaked at -7.6% early 2024, -2.6% mid-2025, -1.3% January 2026 (improving).

Historical 10Y-2Y range: -110bp (peak inversion 2023) to +275bp (peak steepness 2003-2004). Currently +31bp (mid-range).

Historical LEI six-month range: -10% (recession territory, 2008-09) to +10% (early-cycle, 2010, 2021). Currently -1.3% (mid-decline territory).

Current positioning: both indicators in normalization. Yield curve back to positive. LEI decline rate moderating. No recession arrived despite multiple warnings.

2008-09 GFC: yield curve inverted 2006 -25bp peak (mild). LEI six-month -10% peak. Recession December 2007-June 2009. Both indicators agreed, recession confirmed.

2020 COVID: yield curve briefly inverted 2019. LEI six-month -26% peak (March 2020). Recession Q1-Q2 2020. Sudden shock disrupted both indicators.

2001 dot-com: yield curve inverted 2000 -75bp. LEI six-month -4.5% peak. Recession March-November 2001. Both agreed.

1990-91: yield curve inverted 1989. LEI six-month -7% peak. Recession July 1990-March 1991. Both agreed.

1973-75 stagflation: yield curve inverted 1973. LEI declined sharply. Recession November 1973-March 1975. Both agreed.

1966 false positive: yield curve inverted briefly. LEI declined modestly. No recession. Confirms importance of dual-confirmation framework.

2022-2026 anomaly: yield curve -110bp peak (deepest since 1981) + LEI -7.6% peak + Sahm fired July 2024. All three indicators triggered. Recession did not arrive. Most divergent setup in modern history.

Yield curve mechanics: Fed hikes short rates aggressively to fight inflation. Long rates reflect lower future short rates expected (recession + cuts ahead). Inversion = market expectation of future easing.

LEI mechanics: aggregates 10 components capturing real economic activity (building permits, initial claims, ISM new orders, consumer expectations, credit conditions, stock prices, hours worked, capital goods orders, leading credit index, yield curve spread itself).

Feedback loop: yield curve spread is one of LEI 10 components. Yield curve normalization in 2024-2026 partially explains LEI improvement.

Lag structure: yield curve typically inverts 12-18 months before recession (forward-looking). LEI typically declines 6-12 months before recession (more coincident).

2022-2026 disruption: (1) Fed hiked 525bp in 14 months (fastest since 1980) creating mechanical yield curve inversion, (2) services-driven economy ~70% GDP less captured by manufacturing-heavy LEI, (3) immigration labor expansion 3-4M workers absorbed slack, (4) AI capex ~$300B+ annual + fiscal support sustained demand.

April 2026 reading: traditional indicators recalibrating. Both showing improvement without prior recession.

Convergence type 1: yield curve positive + LEI rising = healthy expansion. Best risk-on. Examples: 2010-2014, 2017-2019.

Convergence type 2: yield curve inverted + LEI falling = recession imminent. Risk-off positioning required. Examples: 2008, 2001, 1990, 1981, 1974.

Divergence type 1: yield curve inverted + LEI rising = unconfirmed inversion. Examples: 1966 (no recession), early 2019 (preceded COVID accidentally).

Divergence type 2: yield curve normalized + LEI falling = current April 2026. Yield curve resolved without recession, LEI lagging in normalization.

Divergence type 3: yield curve positive + LEI rising slowly = late-cycle expansion. Soft landing scenario most consistent with April 2026 if LEI normalizes.

April 2026 regime: yield curve +31bp positive + LEI -1.3% (improving from -7.6%). Both normalizing. Recession risk fading. Soft landing scenario base case.

Yield curve drivers: (1) Fed funds 3.50-3.75% paused since December 2024. (2) 10Y 4.31% sticky high reflecting fiscal trajectory + term premium + inflation expectations. (3) 2Y 4.00% reflecting Fed pause expectations. (4) Inflation expectations Michigan year-ahead 4.7% high.

LEI drivers: (1) Initial claims 225K stable. Neutral. (2) Building permits headwind from 6.5% mortgage rates. (3) ISM new orders mixed. (4) Consumer expectations pessimistic (Michigan 4.7%). (5) Stock prices major tailwind (SPY record). (6) Credit conditions tight (HY 280bp). (7) Yield curve normalization tailwind. (8) Hours worked slowing.

Yield curve dominant driver: Fed pause + long-rate stickiness. Curve at +31bp.

LEI dominant driver: stock prices + yield curve normalization (positive) offsetting permits + expectations (negative). Net -1.3% improving.

Both indicators recovering as Fed pause + AI capex sustain demand without inflation re-acceleration.

Bonds: 10Y 4.31% reflects fiscal trajectory + term premium more than recession expectations. 2Y 4.00% pricing modest cuts. Bond market not pricing aggressive recession.

Equities: SPY ~$712 record territory. Equities priced for soft landing. AI-related stocks ~45% of S&P 500 weight.

Dollar: DXY ~100. Mild dollar strength reflecting US growth differential.

Commodities: Gold $4,722 record. WTI $95.85 elevated (Iran war).

Volatility: VIX 18.76 elevated but not stressed.

Credit: HY OAS 280bp tight. IG OAS 80bp 25-year tights. Credit not pricing recession.

April 2026 cross-asset reading: all asset classes positioned soft-landing. Yield curve + LEI false positives widely viewed by markets. Position cautiously but not aggressively recessionary.

Setup 1 (soft landing confirmed, base case 60%): yield curve stays positive (+30 to +75bp range). LEI six-month change improves to 0% or positive. No recession. Trade: long SPY + cyclicals + flatten yield curve carry. Profit from continued expansion.

Setup 2 (delayed recession arrives, risk 30%): yield curve re-inverts. LEI re-accelerates decline below -3%. Initial claims above 350K. Trade: short SPY + long bonds (TLT) + long volatility (VIX calls). Aggressive recession positioning. Both indicators framework correct, just delayed.

Setup 3 (status quo divergence, 10%): yield curve normalized + LEI weak persists. Trade: balanced positioning, watch for resolution.

Key watch points: 10Y-2Y daily, LEI monthly (when shutdown ends + releases resume), initial claims weekly.

Position sizing: in late-cycle uncertainty with conflicting signals, reduce gross exposure 10-20% from neutral. Watch for setup 2 confirmation.

Convex Recession Probability Index (CVRP): synthesizes yield curve + LEI + Sahm Rule + NY Fed model + claims + credit spreads. April 2026 CVRP elevated (Sahm triggered, NY Fed 18.8%, LEI declining). Offset by claims stability + Fed easing room + yield curve normalization.

Convex Net Liquidity Impulse (CNLI): Fed balance sheet + RRP + TGA. April 2026 CNLI neutral-positive. Tailwind to growth.

Convex Risk Appetite Index (CRAI): credit spreads + equity vol + risk currencies. April 2026 CRAI elevated. Risk-on.

Divergence between CVRP (recession concerns) + CRAI (risk-on) characterizes late-cycle. Use yield curve + LEI as early-warning. Watch for resolution.

April 2026 reading: cross-asset markets discount soft landing. Traditional yield curve + LEI reliability under question. Recalibration needed for post-COVID economy.

Yield curve: 10Y-2Y above +50bp = healthy normalization confirmed. Below zero re-inversion = recession warning re-engaged.

LEI: six-month change moves to 0% or positive = false positive confirmed. Re-acceleration below -3% = recession imminent.

LEI release schedule: government shutdown resolution + Conference Board release schedule normalization.

3Ds rule: six-month diffusion below 50 + LEI six-month annualized below -4.3% = recession-imminent signal. Currently NOT triggered.

Initial claims: above 250K = labor market weakening. Above 350K = recession imminent.

Fed cuts: market pricing 1-2 cuts H2 2026. If 75bp+ arrive, yield curve continues steepening + LEI components improve.

NBER recession dating: typically retroactive 6-9 months after start. April 2026 no recession declared.

April 2026 base case: yield curve normalizes to +50-75bp range. LEI six-month change improves to 0%. Soft landing confirmed by year-end.