The bond market is doing something it hasn’t done since 2007 — and could be signaling a recession

The yield curve is flatter than it has ever been since before the financial crisis.

If it gets any worse, there'll be lots of talk of a possible recession, says Craig Johnson, chief market technician at Piper Jaffray. He told CNBC's "Trading Nation" on Friday why this could be a warning sign for markets.

  • The spread between the 2-year and 10-year bond yields is hovering above minor support at 43 basis points. That's its lowest levels since 2007.
  • Yield curve talk, and worries over a curve inversion, will crop up in market headlines more frequently as we approach the June Federal Open Market Committee meeting. The decision-making committee's next meeting is June 12-13.
  • A 25-basis-point hike in June, a near certainty among market participants, would leave the spread between the 2-year and 10-year yield at less than 25 basis points.
  • If the yield curve flattens, or even inverts, expect to see additional selling pressure on the financial sector. The banks, regional banks especially, will be laggards of the sector.

Bottom line: More Fed rate hikes will flatten the yield curve even more, putting strain on financials stocks.

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Trading Nation is a multimedia financial news program that shows investors and traders how to use the news of the day to their advantage. This is where experts from across the financial world – including macro strategists, technical analysts, stock-pickers, and traders who specialize in options, currencies, and fixed income – come together to find the best ways to capitalize on recent developments in the market. Trading Nation: Where headlines become opportunities.

Michael Santoli

Michael Santoli joined CNBC in October 2015 as a Senior Markets Commentator, based at the network's Global Headquarters in Englewood Cliffs, N.J.  Santoli brings his extensive markets expertise to CNBC's Business Day programming, with a regular appearance on CNBC's “Closing Bell (M-F, 3PM-5PM ET).   In addition, he contributes to CNBCand CNBC PRO, writing regular articles and creating original digital videos.

Previously, Santoli was a Senior Columnist at Yahoo Finance, where he wrote analysis and commentary on the stock market, corporate news and the economy. He also appeared on Yahoo Finance video programs, where he offered insights on the most important business stories of the day, and was a regular contributor to CNBC and other networks.

Follow Michael Santoli on Twitter @michaelsantoli

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