One of the bond-market's most reliable indicators of impending U.S. recessions is pointed in a pretty pessimistic direction right now, but contains at least...
One of the bond-market’s most reliable indicators of impending U.S. recessions is pointed in a pretty pessimistic direction right now, but contains at least one optimistic message: The Federal Reserve will remain committed to its battle on inflation and, some analysts say, should ultimately win it.The spread between 2- BX:TMUBMUSD02Y and 10-year Treasury yields BX:TMUBMUSD10Y is stuck at one of its most negative levels since 1981-1982 after shrinking to as little as minus 78.
Higher and stickier yields at the front end of the curve are “a sign of Fed credibility,” with the central bank seen committed to keeping monetary policy restrictive for longer to rein in inflation, said Subadra Rajappa, head of U.S. rates strategy for Société Générale. “Unfortunately, tighter policy will lead to demand destruction and lower growth, which is keeping long-end yields depressed.
Ordinarily, the Treasury yield curve slopes upward, not downward, when the bond market sees brighter growth prospects ahead. In addition, investors demand more compensation to hold a note or bond for a longer period of time, which also leads to an upward sloping Treasury curve. That’s part of the reason why inversions grab so much attention. And at the moment, multiple parts of the bond market, not just the 2s/10s spread, are inverted.
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