US Treasury Bond Yield Curve Inversion Signals Economic Warning

03/08/2023 16:31 • Digital Disruptors • 108 views

It is reported that for the first time since 1981, the yield of US two-year treasury bond is more than 100 basis points higher than that of 10-year treasury bond. The yield of two-year treasury bond was as high as 4.9974% in the session, more than 100 basis points higher than the 10-year yield. The last time the two-year yield was lower than the 10-year yield was in July last year. Fed Chairman Powell’s speech suggested that the terminal policy interest rate may need to be higher than previously expected. The interest rate swap contract price shows that the probability of raising interest rate by 50 basis points in March is slightly higher than that by 25 basis points.

The yield curve of 2-10 year US Treasuries was inverted by more than 100 basis points, breaking the record for more than 40 years

Analysis based on this information:

The US Treasury bond yield curve has inverted for the first time since 1981, a signal that has historically preceded economic recessions. An inversion happens when the yield on short-term bonds becomes higher than the yield on long-term bonds. In this case, the yield on two-year treasury bonds was higher than the yield on ten-year bonds, with a gap of more than 100 basis points. This is an alarming sign that investors are worried about the near-term economic outlook and are seeking the safety of longer-term bonds.

The US Federal Reserve has been raising interest rates to prevent the economy from overheating, but some experts believe that the Fed may be tightening monetary policy too aggressively. In his speech, Fed Chairman Powell suggested that the terminal policy interest rate may need to be higher than previously expected, which indicates that the Fed is likely to continue raising interest rates.

This situation has also caused market volatility, with investors rushing to buy long-term bonds and causing the stock market to lose gains. The interest rate swap contract price shows that there is a higher chance of raising interest rates by 50 basis points in March rather than 25 basis points, which could cause the bond yield curve to invert further. This inversion may also cause other market problems, such as a decrease in bank lending and a slowdown in consumer spending.

The yield curve inversion reflects investors’ anticipation of future economic growth and inflation expectations. The current yield curve inversion is seen as a signal of an economic slowdown or recession in the near future. In the past, the yield curve has inverted before some of the largest economic downturns, including the 2008 financial crisis, and the dot-com bubble in the early 2000s.

In summary, the inversion of the US Treasury bond yield curve is a warning of potential economic troubles ahead. The Federal Reserve may choose to slow their interest rate hikes, but the current situation indicates that the yield curve will probably continue to slope downward. The potential economic slowdown will have an impact on markets and businesses, and investors should keep a close eye on developments in interest rate policy, trade tariffs, and other macroeconomic indicators.

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