The reverse yield curve is often seen as a signal that investors will be more nervous in the near future than long-term and that interest rates on short-term bonds will be higher than those paid on long-term bonds.
The curve hasn’t flipped yet, but it’s getting closer. This is not particularly surprising given that Russia’s invasion of Ukraine and its economic impact continue to have a significant impact on the world economy.
Treasury notes are basically loans to the US government and are generally considered a safe bet for investors as there is little risk of the loan not being repaid.
These government bonds have geopolitical uncertainties Tightening financial status -The Federal Reserve said last week that it was considering six more rate hikes in 2022 alone. As a result, investors have lost their desire for equities and other volatile assets and are looking to credible investments like the Treasury.
But as more people rush to buy bonds, it lowers yields and, as a result, makes them unattractive investments. Some investors are beginning to look for assets that are traditionally less stable than bonds, such as Bitcoin and cash.
10-year government bonds usually yield a higher rate of return than short-term bonds because investors’ funds are committed longer. Short-term government bonds, such as 2-year and 3-year bonds, generally have lower yields because the risks are more predictable than long-term. Time horizon.
However, if the return on 10-year bonds is lower than 2 years, it indicates investors’ pessimistic outlook and resistance to committing their money. And yields are heading in that direction. The spread between 10-year and 2-year bonds is now about 0.2%, compared to about 1.5% a year ago. A yield curve reversal has preceded all recessions since 1955, according to a study by the Federal Reserve Bank of San Francisco.
The reversal does not mean that the stock is about to fall into a meltdown. The reversal usually indicates that a recession is coming. Within the next 12 months, it may take several years. The curve reversed in 2005, but the Great Recession did not begin until 2007. The latest reversal was in 2019, causing fear of recession. This happened in 2020, due to Covid-19.
Anyway, some market participants are ringing the alarm.
“I think it’s very likely that the economy will go into recession or worse,” activist investor Carl Icahn said in an interview with CNBC on Tuesday. “We have a strong hedge against long positions … I don’t even anticipate in the short term.”
Mark Zandi, chief economist at Moody’s Analytics, told CNN on Thursday.
“The harder it is for the Fed to brake, the more likely it is that cars will be confiscated and the economy will slow down,” Zandy said.