Monday, January 30, 2023

US bond yield curve inversion points to recession

US bond yield curve are taken into account by many investors at the time of Assess the health of the US economy, it has reached your Most Invested Points Since 1981which shows that one recession on the horizon According to Kate Duguid in the Financial Times.

The gap between short-term and long-term US borrowing costs has reached its widest point since 1981, indicating that investors expect The Federal Reserve is persevering in its fight to control inflation, even as recession concerns grow.

The two-year Treasury yield was trading at 4.2% on Wednesday, while the 10-year yield was at 3.4%, narrowing the gap between the two to 0.84 percentage points., The pattern known as an “inversion” of the yield curve is Before every US economic recession in the last 50 years.

The investment deepening comes after a report last week showed US economy continues to add jobs at strong pace in November And a major survey shows that Activity in the vast services sector is expanding rapidly.

While the data paints a rosy picture of the state of the economy, some investors worry that it will also would encourage the Fed to continue raising interest rates next yearafter taking them from about zero to a 3.75 to 4% range so far in 2022, In return, it is expected Higher borrowing costs increase pressure on the economy and potentially trigger a recession,

“The market was betting on him Fed will be forced to slow down, Last year taught us that the market has proved this assumption wrong time and again. Edward Al-Husseini, Senior Analyst, Columbia Threadneedle,

Changes in the US bond market also reflect the same Investors are more aligned for next year with what the Fed has said, Although Yield curve has been flat throughout the year, rebounding since late November and investors last week Begins to waive two interest rate cuts by the end of 2023which indicates a monetary policy easing,

This distinction between the Fed and the markets became especially clear after a speech by the Fed President Jay Powell last week in which he mentioned that Although the US central bank will slow rate hikes at its December meeting, it will do so to allow rates to remain high for a longer period of time, The markets focused on the first piece and not the second.

However, after After the release of the US jobs report on Friday, the yield curve has been flattenedAlthough next year’s rate cut is still in the price. Futures Market suggest currently Federal Funds Rate “Terminal”or the pinnacle of this cycle about 5% in Mayagainst A’s expectations Minimum 4% in September,

“[The November payrolls report]reminded us that the labor market remains in a very good place, and we expect to see that higher terminal rate reflected in the numbers,” he said. Ben Jeffery, US Rate Strategist at BMO CapitalReferring to the quarterly survey of Fed officials on where the economy and monetary policy will be in the coming years, also known as “dot plot”. The following dot chart will be released at the December Fed meeting.

Curva De Rendimiento

The most basic signal sent by the inversion of the yield curve is Investors believe that the Fed’s increase in short-term rates will dramatically curb inflation. The magnitude of this reversal then reflects the dramatic pace of rate increases and the fact that the Federal Reserve has maintained that pace even as investors have shifted their expectations about inflation and growth.

“We think the shape of the yield curve is a barometer of the extent to which monetary policy tightening can be expected, and the market clearly feels that tightening will continue for some time,” he said. Mark Cabana, head of US rate strategy at Bank of America.

Jonathan Kohn of Credit Suisse added that “a deep inversion of the yield curve suggests that investors believe the Fed is committed to reducing inflationEven if you have to sacrifice potential growth or recession.”

in a December survey conducted by University of Chicago Booth School of Business Initiative on Global Markets in Collaboration with the Financial TimesThe 85% of economists said they expect the National Bureau of Economic ResearchThe mediator of the American recession, will announce one for next year,

Although the yield curve has been a reliable bearish indicatorThe details of the depth and scope of the investment are a matter of debate.

“The inverted yield curve is actually a very good indicator of a recession, without providing information about its depth or severity,” he said. Guy Lebas, chief fixed income strategist at Janney Montgomery Scott. “In this case, the reversal probably tells us more about the direction of inflation and inflation risks than about the depth or severity of the recession.”

While strategists such as Lebas argue that the degree of yield curve inversion cannot directly predict the extent of the next recession, the current intensification could have wide-ranging effects if it leads to a change in investor behavior.

“The most important aspect of the yield curve is what it does with risk-taking,” he said. Gregory Peters, Co-Head of Fixed Income Investments at PGIM, “It’s a self-reinforcing mechanism.”

Nation World News Desk
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