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US: Bond yield spread on the brink of recession

by tarimendeksi

While the level of rate hikes regarding Fed policy and whether it will harm the economy is debated, the concerns that a Fed that is late for inflation may overdo it cause the risk of recession to be seen more. The situation, which is reflected in the bond rates, indicates that spreads such as 2-10 years or 10-30 years are at levels that will refer to the recession threshold.


In the normal yield curve, short-term interest rates are smaller than long-term interest rates, and the slope of the curve is upwards. In the past, the consistently inverted yield curve has preceded all previous recessions the U.S. economy has experienced since 1955. In other words, these reference values ​​reveal the possibility of a recession in 2023. Since the issue of how the Fed will act in the fight against inflation in the future is decisive for the spread movement, the expectations of a 50 basis point increase in interest rates in May should be followed carefully.


Comparison of historical 10-year – 30-year Treasury yield spread and 2-year – 10-year Treasury bond interest spread. Source: Bloomberg


The Fed considers it necessary to increase interest rates to combat inflation. High inflation expectations support this phenomenon. For this reason, it is known that the Fed will apply higher interest rates in the future. If the Fed eliminates the policy-induced inflation phenomenon, it will be able to dust some of the 40-year high inflation. However, in an environment where external factors are so effective, there is a possibility that a monetary policy phenomenon that will be ineffective against inflation will reduce the consumption power in the economy and that excessive interest rates will cause recession. Thus, whether this curve excludes recession will depend on the Fed’s ability to control inflation or the belief that it can do so. If the Fed does not feel the need to raise interest rates excessively, economic growth will remain at standard levels. It should be noted that in the current situation, factors originating from Russia still create an uncertainty band.

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