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This blogger says that continued increases in short-term interest rates may lead to an inverted yield curve, or a condition where short-term interest rates are higher than long-term interest rates. No guarantees which way the yield curves will go this year, but an inverse yield curve is usually not a good sign for the economy. But it means home mortgage rates would remain historically low.

[S]hort-term rates (represented here by 1-year Treasury yields) have indeed been moving up since the Fed starting raising their target rate. In fact, they were moving up before the Fed's decision as the market was probably anticipating the rate hikes. However, long-term rates (10-year Treasury yields in my example) have not shown the same movement. Instead, the have held steady and even fallen slightly!

Due to these trends the "yield spread," that is, the difference between the two rates, has been falling sharply. It has dropped by almost 2 full percentage points since the beginning of 2004.

Now at this point I should stress that there is nothing to guarantee that this trend will continue. But if it does continue, it's entirely possible that by the end of the year (or shortly thereafter) we could have that strange economic phenomenon known as an "inverted yield curve" (or maybe just a flat one).

An inverted yield curve is a curious situation because investors are earning more money on short-term investments than long-term ones, the opposite of what we'd expect. Under "normal" conditions, investors will demand higher rates of return in exchange for giving up their money for a longer period of time.

As far as leading indicators for recessions go, there isn't anything much better than the IYC. The chart I've constructed below (click it for a better image) shows just the spread between 10-year and 1-year Treasury yields. Those years were selected as they were the longest weekly time-series I could find, going back to 1953 (data from the Federal Reserve).