Greenspan Is Wrong: Yields Say Recession Risk Is 50 Percent (Daniel Kruger)

  The probability the U.S. economy will shrink for two quarters has risen to 50 percent, according to a model created when Greenspan ran the Board of Governors of the Federal Reserve System. The formula is based on differences in yields on Treasuries.

  By Daniel Kruger

  March 12 (Bloomberg) -- Alan Greenspan, who jolted investors by predicting a one-in-three chance of a recession this year, isn't as bearish as the bond market, where the risk of a downturn is even money.

  The probability the U.S. economy will shrink for two quarters has risen to 50 percent, according to a model created when Greenspan ran the Board of Governors of the Federal Reserve System. The formula is based on differences in yields on Treasuries.

  The economy has gone into recession six of the seven times since 1960 that short-term interest rates topped longer-term bond yields, as they do now. The difference between three-month bills and benchmark 10-year notes is close to the widest since 2001. Investors say the so-called inverted yield curve is a sign the Fed will cut borrowing costs because the economy is decelerating.

  ``We're going to have slower growth,'' said Barr Segal, a managing director at TCW Group Inc., a Los Angeles-based firm that oversees $80 billion in fixed-income assets. ``The fundamentals of the economy are what you have to watch.''

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