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

Bond market may be headed toward 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.