© Courtney Crow
Third
A section of the closely watched US Treasury yield curve inverted on Tuesday for the first time since September 2019, a reflection of market concerns that the Federal Reserve might tip the economy into recession as it battles rising inflation.
For a brief moment, the yield on the two-year Treasury note was higher than that on the benchmark 10-year note. That part of the curve is considered by many to be a reliable sign that a recession might come in the next year or two.
The spread between the two-year bond and the 10-year bond briefly fell to minus 0.03 basis points, before bouncing back above zero to 5 basis points, according to Refinitiv data.
While the brief reversal of August and early September 2019 was followed by a decline in 2020, no one foresaw business closures and economic collapse due to the spread of COVID-19.
Investors are now concerned that the Federal Reserve will dent growth as it aggressively raises rates to fight rising inflation, with price pressures mounting at the fastest pace in 40 years.
“The moves in the twos and tens are a reflection of the market becoming increasingly nervous that the Fed will fail to encourage a soft landing,” said Joe Manimbo, senior market analyst at Western Union Business Solutions in Washington.
Western sanctions imposed on Russia following its invasion of Ukraine have created new volatility in commodity prices, adding to already high inflation.
Fed fund futures traders expect the Fed benchmark rate to rise to 2.60% in February from 0.33% today.
Some analysts say the Treasury yield curve has been distorted by massive Federal Reserve bond purchases, which are holding back long-term yields relative to short-term ones.
Another part of the yield curve that is also monitored by the Fed as a recession indicator remains far from inverting. This is the part of the curve at three months and 10 years, which is currently at 184 basis points.
In any event, the lag between a two-year and 10-year curve inversion and a recession is typically relatively long, meaning an economic downturn isn’t necessarily a concern at this point.
“The time lag between a reversal and a recession tends to be, call it 12 to 24 months. Six months has been the shortest and 24 months has been the longest, so it is not something that can be taken into account by ordinary people,” said Art Hogan, chief market strategist at National Securities in New York.
Meanwhile, analysts say the US central bank might use withdrawals from its massive $8.9 trillion bond holdings to help re-steep the yield curve if it is concerned regarding the steepness and its implications.
The Fed is expected to start reducing its balance sheet in the coming months.
