This illustration shows a US dollar bill in front of the stock chart on June 12, 2022. REUTERS / Dado Ruvic / Illustration
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NEW YORK, July 5 (Reuters) – A closely watched part of the U.S. Treasury yield curve was reinvested on Tuesday as investors continue to assess the possibility of the Federal Reserve’s aggressive move to reduce inflation pushes the economy into recession.
Yields on two-year Treasury bonds rose slightly above those on 10-year Treasury bonds for the third time this year, a phenomenon known as a reversal of the yield curve that has preceded US recessions in the past. .
It comes amid a chorus of growth warnings on Wall Street, as the Fed’s intention to cut inflation from highs of more than 40 years sets the course for an aggressive tightening of monetary policy that investors fear which also harms the growth of the United States.
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Here’s a quick introduction to what a steep, flat, or inverted yield curve means, how a recession has predicted, and what it might be indicating now.
WHAT SHOULD THE CURVE LOOK LIKE?
The U.S. Treasury finances the budget obligations of the federal government by issuing various forms of debt. The $ 23 trillion Treasury market includes one-month, one-year, two- to 10-year notes and 20- and 30-year bonds.
The yield curve, which represents the return on all Treasury securities, tends to rise as the payment increases over time. Yields move inversely to prices.
A sharpening curve usually indicates expectations of stronger economic activity, higher inflation and higher interest rates. A flattened curve may mean that investors expect short-term rate hikes and are pessimistic about economic growth.
WHAT DOES AN INVERTED CURVE MEAN?
Investors view parts of the yield curve as indicators of recession, mainly the differential between three-month Treasury bonds and 10-year notes, and the two- to 10-year segment (2/10).
On Tuesday, yields on two-year Treasury bonds rose to 2.95%, while those on 10-year bonds stood at 2.94%. Part of the two-year, five-year curve was also reversed for the first time since February 2020.
Investments suggest that while investors expect higher rates in the short term, they may be nervous about the Fed’s ability to control inflation without hurting growth, although policymakers say they are confident of achieving the so-called “soft landing” for the economy. Read more
The Fed has already raised rates by 150 basis points this year, including a 75 basis point increase last month.
The two- to 10-year segment of the yield curve was reversed in late March for the first time since 2019 and again in June.
The U.S. curve has been reversed before each recession since 1955, with a recession after six to 24 months, according to a 2018 report by San Francisco Fed researchers. He offered a false signal only once at that time. This research focused on a slightly different part of the curve, between one- and ten-year yields.
Anu Gaggar, global investment strategist for the Commonwealth financial network, found that the 2/10 spread has been reversed 28 times since 1900. In 22 of those cases, a recession followed, he told the June.
Over the past six recessions, a recession began on average between six and 36 months after the curve reversed, he said.
Before March, the last time part 2/10 of the curve was reversed was in 2019. The following year, the United States entered a recession, which was caused by the pandemic.
WHAT DOES THIS MEAN FOR THE REAL WORLD?
While rate hikes can be a weapon against inflation, they can also slow economic growth by increasing the costs of loans for everything from mortgages to car loans.
The yield curve also affects consumers and businesses.
As short-term rates rise, U.S. banks raise benchmark rates for a wide range of commercial and consumer loans, including small business loans and credit cards, making lending more expensive. for consumers. Mortgage rates are also rising.
When the yield curve worsens, banks can borrow at lower rates and lend at higher rates. When the curve is flatter, their margins narrow, which can deter lending.
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Report by David Randall; Editing by Ira Iosebashvili and Sam Holmes
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