The reversal of the main yield curve slide in the US is a warning sign of recession

Traders work on the floor of the New York Stock Exchange (NYSE) in New York City, US, January 10, 2022. REUTERS/Brendan McDermid/File Photo

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NEW YORK (Reuters) – A section of the closely watched U.S. Treasury yield curve inverted on Tuesday for the first time since September 2019, in a reversal of market fears that the Federal Reserve could push the economy into recession as it battles spiraling inflation. .

For a brief moment, the yield on two-year Treasuries was higher than the yield on 10-year Treasuries. Many view this part of the curve as a reliable indication that a recession may come in the next year or two.

The two-year and 10-year spread briefly fell below 0.03 basis points, before rebounding back above zero to 5 basis points, according to Refinitiv data.

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While a short reversal in August and early September 2019 was followed by a downturn in 2020, no one expected business closures and economic collapse due to the spread of COVID-19.

Investors are now concerned that the Federal Reserve will dampen growth as it hikes rates aggressively to combat soaring inflation, with price pressures rising at the fastest pace in 40 years.

“The movements between the pairs and the dozens are a reflection of market nervousness that the Fed may not succeed in promoting an easy landing,” said Joe Manimbo, chief market analyst at Western Union Business Solutions in Washington.

Western sanctions imposed on Russia after its invasion of Ukraine have led to new fluctuations in the prices of basic commodities, driving up inflation already.

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Fed fund futures traders expect the Fed’s benchmark rate to rise to 2.60% by February compared to 0.33% today. FEDWATCH

Some analysts say the Treasury yield curve has been distorted by the Fed’s massive bond purchases, which are putting pressure on long-term yields compared to short-term yields.

Short and medium-term returns jumped as traders’ prices rose more and more.

Another part of the yield curve is also being watched by the Fed as an indicator of a recession that is far from inverting.

This is the three-month and 10-year portion of the curve, which is currently at 184 basis points.

In either case, the difference from reversing part of the 2-year or 10-year curve into a recession is relatively long, which means that the economic downturn is not necessarily a concern at the moment.

“The time lag between reversal and stagnation tends to be, it’s called anywhere between 12 and 24 months. Six months was the shortest and 24 months was the longest, so it’s really not something that is doable for normal people,” said Art Hogan. , chief market strategist at National Securities in New York.

Meanwhile, analysts say the US central bank could use withdrawals from its massive $8.9 trillion bond holdings to help re-slope the yield curve if it is concerned about the slope and its ramifications.

The Fed is expected to start cutting its balance sheet in the coming months.

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(Reporting by Chuck Mikolajchak and Karen Brittel); Additional reporting by John McCrank. Editing by Alden Bentley and Nick Szyminski

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