One of the favorite indicators of a recession in the danger zone, don’t panic, says the Fed, Market News

A big move in American rates, one of those that don’t report anything good. The 10-year interest rate in the US jumped on Tuesday to a new three-year high of 2.4% on the secondary debt market. The two-year Treasury rate is almost at the same level, which is an aberration, it is not normal for the United States to borrow for ten years at the same level as for two years.

A flattening of the curve, and especially its inversion, is a harbinger of a recession. “All but one time, when there was an inversion of the curve between two years and ten years, the recession occurred within thirty-seven months.”that is, within three years, lists Jim Reed, a strategist at Deutsche Bank.

In the bond market, debt specialists “We strike the alarm”, explains one of them. Debt specialists doubt the ability of the Fed, the US central bank, to secure a soft landing for the economy as it raises interest rates to fight inflation.

Sharp moves in the bond market came after yesterday’s speech by Fed Chairman Jerome Powell at the annual conference of the National Association for Business Economics (NABE), the largest US association that brings together market economists and scientists in this field. .

In parts 50

Now that the Fed’s monetary policy meeting has ended – that was last week – US central banks can once again speak at private events such as seminars. Jerome Powell said yesterday that US inflation “too high”, as a result of which the Fed – this time the market is sure of it – will forcibly raise its main key rate. This summer alone, this figure could increase by 100 basis points. After Jerome Powell’s intervention at the annual NABE conference, Goldman Sachs does expect the Fed to raise rates by 50 basis points at its May and June monetary policy meetings, allowing the rate to pass at 1.25-1.5% vs. range 0.25-1.5%. 0.5% currently.

Last week, the Fed, which controls the short rate, raised it for the first time since 2018, taking it out of zero policy to 0.25-0.5% (+0.25 points or 25 basis points). The central bank of the world’s largest economy is planning six more hikes this year.

“Especially telling is that Chairman Powell said yesterday that there is nothing to stop the Fed from going up 50 basis points if necessary.Jim Reed comments. Last week, the Fed would certainly have risen by 50 basis points if it were not for the uncertainty around the events in Ukraine. Indeed, investors are becoming increasingly aware that this round of hikes will be very different from 2015, and Fed futures were worth over 200 basis points for a 2022 rate hike yesterday for the first time (including 25 basis points last week). »

“You have to look at the short end of the curve”

Jerome Powell’s hawkish speech to NABE “highlights the predicament the Fed finds itself in after slowing inflation expectations were contradicted by persistent and unexpected supply chain problems, and more recently by Russia’s invasion of Ukraine.notes economist Christian Parisot, for broker Aurel BGC. He has [toutefois] reiterated that the economy is strong and that the central bank’s concerns are focused on inflationary risks. »

Today, minus 20 basis points separates the two-year US sovereign rate from the ten-year rate, the smallest difference since March 2020 and the start of the global lockdown.

Less than 20 basis points separate the ten-year US sovereign bond rate from the two-year debt rate, the lowest
Less than 20 basis points separate the 10-year US sovereign bond rate from the 2-year debt rate, the lowest ‘spread’ in two years | Photo Credit: Bloomberg.

Curve “aggressively smoothes”we observe at JP Morgan without further concern, as their “preferred indicator of recession [les spreads de taux sur la partie courte de la courbe] does not report risks. » The spread between the current rate of three-month Treasury bills and their eighteen-month forward rate (the rate that is forecast for the same bills in eighteen months), currently over 200 basis points, is also the Fed’s preferred rate. “The folks at the Federal Reserve have done a good study that really says to look at the short end of the curve – the first eighteen months.”, said Jerome Powell yesterday in response to a question. In a scientific paper published in June 2018, Fed economists Eric Engstrom and Steven Sharp argued that credit spreads at the short end of the curve obtained in the futures market are more predictive of recessions than the yield spread between ten-year and two-year bonds. -annual treasury bonds, although more widely accepted. Betting spread derived from forward currently the highest since 2002.


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