- Part of the US bond yield curve inverted for the first time since 2006 Monday, fuelling fears about a recession.
- Some investors are concerned that the Fed will damage the economy by hiking interest rates hard in 2022.
- However, plenty of strategists say the yield curve is no longer a reliable indicator of future growth.
- For more stories go to www.BusinessInsider.co.za.
Part of the US bond yield curve briefly inverted for the first time since 2006 Monday, adding to fears that a recession could soon hit the country's economy as the Federal Reserve hikes interest rates hard.
Monday's move added to chatter on Wall Street and in other financial centers that a recession may be on its way, given bond yield curve inversions have historically foreshadowed sharp economic slowdowns in the US.
"When yield curves begin to invert, it's usually a signal that investors have lost their confidence in the economic recovery story and are now preparing for a slowdown or possibly a recession over the next few quarters," Hussein Sayed, chief market strategist at trading platform Exinity, said.
Bond yields, which move inversely to prices, have risen dramatically in 2022 as the Federal Reserve has started to raise interest rates. It hiked the federal funds target rate by 25 basis points to between 0.25% and 0.5% earlier in March.
Rising interest rates prompt investors to demand higher returns on bonds, which in turn pushes yields up and prices down.
The market now believes the Fed will start hiking even harder, following "hawkish" speeches from officials at the central bank last week. Citi said Friday it expects policymakers to raise interest rates by 50 basis points at its next four meetings.
Those expectations on Monday fueled a further rise in shorter-dated bond yields, which are most sensitive to interest rate changes.
However, the yields on longer-term US bonds have not risen as sharply as those on shorter-dated bonds. This suggests that investors think inflation — another key factor influencing bond yields — and growth will be lower in the future, as interest rate rises dampen the economy.
The yield on the 5-year US Treasury note climbed as high as 2.671% Monday. That took it above the 30-year yield, which stood at 2.647% at the same moment. The 30-year yield later rose back above the 5-year.
The most-closely watched relationship is the gap between the 2-year and the 10-year Treasury. An inversion of those two yields has heralded the last 10 out of 13 recessions, according to Bank of America. The gap stood at 0.18 percentage points Friday, having plunged from 1.59 percentage points in March 2021.
However, many analysts are skeptical about the predictive power of the bond market, and say a US recession remains unlikely. Many economists say central bank interventions in the bond market mean it's no longer a reliable indicator.
"The predictive power of the bond yield curve doesn't really work," Paul Donovan, chief economist at UBS Global Wealth Management, said. "Globally, inverted yield curves happen all the time without any hint of recession."
Donovan said recession risks have risen, however. Yet he added: "These are exceptional times, and the momentum of reopening the economy should reduce recession risks."