Brief inversion of the U.S. bond yield curve between two and 10 years has unsurprisingly sounded alarms, Mike Dolan writes
Given its track record in preceding the last four recession since 1990, the brief inversion of the U.S. bond yield curve between two and 10 years has unsurprisingly sounded alarms about another pending recession over the next 18 months.
But as the spread between the two key short and long-term borrowing rates troughed about -7 basis points on April 1, many have dismissed the signal as something of a fools day joke. Before the recession actually hit in the middle of 1990, the 2-10 curve had already turned back positive – moving almost 50 bps higher from the most negative point of the inversion in April 1989.
The Fed this week blared out its intention to start slashing the balance sheet this year alongside planned steep rate rises, with the minutes of last month’s meeting flagging a cut of almost $1.2 trillion over the next year or so.But it did nothing to lift the still-negative ‘term premium’ that’s supposedly depressed by Fed distortions at the long end. All this week’s movement coming ‘real’ or inflation-adjusted Treasury yields more reflective of Fed policy rate projections themselves.
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