Paladin Management Group

Historical Recession Indicators

• Recessions typically only begin after the Fed begins lowering rates. That's what happened before the last four recessions going back to 1990.
• We are seeing all the troubling signs you'd expect to see leading up to a recession.
  • • Credit-card debt is at an all-time high and still rising.
    • Delinquency rates on car loans are soaring.
    • About 67% of the workforce is living paycheck to paycheck today, up from 63% last year.
• The cost of borrowing has risen sharply since 2021, and it's killing companies with high debt loads.
• Total bankruptcy filings reached 655 this year through October, compared with 687 for all of 2024.
• Large U.S. corporate bankruptcies are on pace to hit their highest level in 15 years, according to S&P Global data cited by Reuters.

What these bankruptcies signal

A wave of corporate bankruptcies is exposing growing cracks in the credit system:

• Refinancing pressure: Higher long-term rates are pushing up borrowing costs across the board, turning 2025–2027 debt maturities into stress points for heavily leveraged companies.
• A widening gap in liquidity: Strong, investment-grade names can still access capital markets, but marginal borrowers are finding the window closed or facing prohibitively high costs to borrow.
• Consumer-credit fragility: In subprime pockets, higher funding costs plus a cooling job market are leading to more delinquencies and losses, squeezing lenders’ margins.

Why It’s Happening: The 10-Year Treasury and Long Rates

The 10-year treasury yield is the economy’s key benchmark. It drives 30-year mortgage rates, influences corporate and municipal borrowing costs, and shapes how investors value everything from stocks to real estate.

While short-term rates affect things like credit-card interest, the real economy runs on long-term borrowing. That’s why the 10-year yield—more than any other rate—sets the tone for financial conditions. The 10-year Treasury yield is the balance point around which everything else in the financial system moves.

As Fed Chair Jerome Powell emphasized after the September policy meeting, “In the committee’s discussions … there were strongly differing views about how to proceed in December. A further reduction in the policy rate … is not a foregone conclusion.” That uncertainty has kept long yields elevated as markets weigh whether policy will truly ease.

The Fed controls the short end; markets control the long end

The Federal Reserve sets the federal-funds rate, which governs overnight borrowing.  But long-term interest rates—like the 10-year Treasury—are set by the market, not the Fed.  They reflect three things: where investors think short-term rates are headed, what they expect for inflation, and how much extra return they demand for holding longer-term bonds (known as the “term premium”).

That is why long-term rates often refuse to “follow” the Fed.

In fact, since the first policy rate cut last September, the 10-year yield has risen about 50 basis points to roughly 4.1%. Markets are signaling skepticism that inflation will fall decisively back to 2%, and investors want more compensation for risk as Treasury supply stays heavy and policy uncertainty lingers.

If the 10-year stays high—or rises—front-end cuts won’t meaningfully ease financial conditions.

What’s pushing long yields up

• Stubborn inflation expectations: Markets still see inflation lingering above the Fed’s 2% target, especially in the 5- to 10-year window.
• Term premium: Investors are demanding more compensation for holding long-term bonds given large Treasury issuance, quantitative tightening, and concerns around deficits and market liquidity.
• Strong real growth: Solid real activity and productivity gains keep real yields elevated, supporting higher long rates.

Powell’s recent remark that a December rate cut “is not a foregone conclusion” reinforced this market uncertainty  — and that uncertainty itself helps push yields higher as investors demand more compensation for risk.

Are rate cuts inflationary?

Rate cuts don’t always have the same effect. They can fuel inflation if they spur spending when the economy is already running hot, or cool inflation if they come during a slowdown when demand is weakening. Right now, the mix of sticky services inflation, consumers and businesses continuing to spend, even after accounting for higher prices, and ongoing fiscal impulse—makes it easy for markets to read cuts as easing financial conditions, not a sign that inflation is being tamed. That helps explain why long rates have not fallen with the Fed’s cuts.

Why Quantitative Easing (QE) may be the next lever

If the Fed wants to bring long-term rates down directly, it may turn again to quantitative easing (QE)—buying longer-dated Treasurys in large amounts. Those purchases reduce the “term premium,” making it cheaper to borrow for things like mortgages, corporate loans and investments.

After the global financial crisis and during the pandemic, QE became a key tool for influencing the part of the yield curve most relevant to mortgages, corporate finance, and asset valuations. If inflation expectations remain stubborn and the supply of Treasurys remains heavy, QE is the most direct lever the Fed has to influence long rates .

Money, credit, and inflation

QE creates bank reserves to buy assets—what many describe as “printing money.” It can be inflationary when it translates into faster growth of broad money and credit relative to real output.

After the pandemic, money supply surged at a record pace alongside massive government spending and supply shortages, and inflation spiked. As money growth slowed and even contracted through much of 2022–2023, inflation eased. Now that money growth has turned positive again, there’s a risk inflation could re-accelerate if demand stays strong.

Milton Friedman’s core insight still applies: over time, inflation happens when money and credit grow faster than the real economy. To bring it down, those flows need to slow. That usually means higher real rates for long enough to cool spending, less borrowing, and soft labor demand—giving the economy time for supply to catch up.

What would bring long rates down sustainably

• Clear disinflation: Convincing evidence that inflation is trending back to target lowers inflation expectations and real rates.
• Term-premium relief: Smaller budget deficits and reduced Treasury issuance, better market liquidity, or explicit balance-sheet support (ending QT, moving toward QE) could all ease upward pressure on long rates.
• Growth downshift: A softer real economy typically pulls real yields lower—but at the cost of higher unemployment and rising defaults before the cycle resets.

The road ahead

• Watch the 10-year, not just the Fed's short-term rate. It is the rate that sets the tone for mortgages, corporate finance, and valuations.
• Expect more dispersion in credit performance. Companies with healthy margins, manageable debt, and flexible funding will adapt.  Highly leveraged borrowers facing debt maturity walls and cyclical demand are vulnerable.
• Monitor money and credit growth. If liquidity starts expanding again—especially alongside any renewed Fed balance-sheet expansion, inflation risks reheat, even if QE compresses long rates.
• Prepare for policy trade-offs. To directly lower long rates, the Fed may have to pivot from quantitative tightening to QE. That would likely reduce the term premium and mortgage rates but could support money and credit growth, risking another inflation flare.

Bottom line

Long-term rates, not overnight policy, are doing the heavy lifting this cycle.  As long as the 10-year Treasury remains elevated, financial conditions will stay tight where it matters most—mortgages, corporate borrowing, and asset valuations.

Higher-for-longer long rates and selective capital markets are exposing leverage and fragile funding models. Unless disinflation reasserts itself clearly, the Fed’s only direct path to lower long rates is QE—and deploying it would revive the very forces that helped make inflation sticky in the first place.