one of the bond market’s most popular indicators of approaching us recessions has the potential to post one of its most negative readings since the early 1980s reign of former fed chairman paul volcker  that’s the view of a team at bnp paribas which says that the spread between 2 tmubmusd02y and 10year treasury yields tmubmusd10y could get to around minus 130 basis points if the fed ends its ratehike cycle with a 475 fedfunds rate target the spread is negative or inverted if the yield on the 2year note surpasses the 10year yield the spread could even invert beyond minus 150 basis points if the terminal fedfunds rate is above 5 they said that compares with tuesday’s level of minus 35 basis points  the fed’s commitment to holding rates in restrictive territory in the face of a recession is what makes the scenario of extreme inversion “plausible” based on an analysis of the spread since the 1970s according to bnp economist carl riccadonna plus strategists calvin tse and timothy high the 2s10s spread which has a reliable track record of predicting economic downturns albeit with a lag first turned negative this year in april before going further below zero over the summer “can the curve invert further we think yes” the bnp team wrote in a note “far deeper inversions were witnessed when the fed was last fighting exceedingly high inflation indeed the most inverted the curve got in the last 50 years was in march 1980 at −241bp” financial market participants are increasingly coming around to the idea that persistent inflation may produce an era of higherratesforlonger around the world under volcker the fed pushed interest rates to as high as 20 in order to break the back of inflation    “to be clear we are not necessarily forecasting another 75–100bp of 2s10s inversion” the bnp team wrote “other factors such as the domestic fiscal impulse global tightening overseas bond yields rising from extremely depressed levels and fed qt quantitative tightening can contribute to the level of the 2s10s ust curve” still “in addition to the quantitative arguments we believe there are fundamental ones that suggest a very deep curve inversion is possible this cycle”  one is that shortend yields will have a challenging time falling in the near term considering the fed will likely “be boxed out of quickly pivoting toward accommodation amid early signs of labor deterioration or outright recession” meanwhile “longerend yields could instead serve as the ‘release valve’ to price the economic slowdown or potential recession” on tuesday traders and investors continued to adjust to the likelihood of higherforlonger us interest rates by sending the 10year yield toward 4 a level not seen on an intraday basis since april 5 2010 the 10year rate hasn’t finished at or above 4 during the new york session since oct 15 2008 according to tradeweb an early bounce by stocks faded at midday with the dow jones industrial average djia down 90 points or 03 while the sp 500 spx edged own 02 the dow slipped into a bear market monday joining the sp 500