“We no longer see the Fed achieving a soft landing. Instead, We anticipate that a more aggressive tightening of monetary policy will push the economy into a recession. Deutsche Bank economists wrote in the report.
The eyes of investors around the world are focused on an indicator that, in 75% of cases, was able to predict a recession in the United States economy. Amid an attempt by the Federal Reserve to get inflation back on track and war-driven commodity price hikes, that signal becomes more important. However, while significant, it is not an infallible indicator.
The rates of the United States Treasury bonds began to show higher levels in the short term than in the long term. That differential was seen clearly at the beginning of this week, when the 5-year bonds showed yields of 2.62% per year, while the 10-year bonds offered a premium of 2.48% per year.
Why are investors willing to receive higher rewards for investing for a 5-year term than for a 10-year term? According to Mill Capital Group, in general terms, lower yields in the long term than in the medium term imply an expectation that interest rates will be lower in the more distant future than in the most immediate future. Something associated with recessions in which interest rates tend to fall.
Second, a higher return in the short term than in the long term usually indicates that a higher risk is expected in the second of these time horizons. But given the small spread between the points, it does not appear that investors are fearing credit problems from the US Treasury, the “zero risk” in global markets.
So what do investors think they see? With year-on-year inflation in the United States well above 7%, its highest level in 40 years, the question is whether the Fed was not late in trying to calm price dynamics.
If inflation does not respond to the attempts of the monetary authority to contain it, the risk that it will have to overreact with more extreme measures to put it in the box is greater. A more contractionary monetary policy – with higher rates and less liquidity – has the potential to slow down the economy.
And all this without adding the problem generated by the spike in oil and raw materials, which add greater instability to prices.
Since 2006, years before the crisis abolishes, an “inverted curve” has not been seen in the yields of the United States Treasury bonds. Every American recession since World War II was preceded by one. Although not in all cases the inversion of the curve was followed by a fall in the product.
Source: Ambito
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