In the past often a clue to the coming recession
Not all experts fear the recession specter
The fear of a massive deterioration in the economic situation, a recession, is driving US investors in particular. An indicator has now appeared on the US bond markets that has further strengthened this recession fear.
Inverse yield curve causes uncertainty
For the first time since 2006, the yield on 5-year government bonds exceeded that on 30-year government bonds. While the 5-year government bond yield rose to 2.56 percent, the 30-year government bond yield fell to 2.55 percent. In concrete terms, this means that the effective yield of long-dated bonds is lower than that of shorter-dated bonds – a rare phenomenon in the bond market since investors who commit themselves to the longer term are generally rewarded more for their investment given the higher risks.
If the yield curve is inverted, however, and is called inverse or negative, this often causes massive uncertainty on the market, because an inverted yield curve has proven to be a reliable harbinger of a coming recession in the past. The Federal Reserve Bank of Cleveland has confirmed such a connection in a model: According to this, in US history, a recession has often occurred within a year of short-term interest rates being higher than long-term interest rates.
Bond yields have been under scrutiny for some time
The phenomenon that long-dated bonds perform worse in terms of returns than short-dated interest-bearing securities has been evident in the US bond market for some time. For example, there has been an inverse yield curve between five- and ten-year bonds for weeks, and the yields on two- and ten-year government bonds have also recently reversed.
Investors are therefore particularly concerned about the situation on the bond market, because the signal that the bond market is sending comes unusually early: The US Federal Reserve has only just initiated the turnaround in interest rates, in the past an inverted interest rate curve was more likely to be seen towards the end of a Rate hike cycle, writes the “Tagesschau”.
What danger is threatening the US economy?
The developments on the stock market were fueled by statements by Fed boss Jerome Powell. In view of the “much too high” rate of inflation, he had brought the possibility of faster increases in the key interest rate into play. Investors on the other side of the Atlantic were unnerved by the news that the Fed could raise interest rates by more than 0.25 percentage points at upcoming meetings of the central bank if necessary.
Observers have been criticizing for some time that the interest rate turnaround by the US Federal Reserve came too late and that the currency holders are now under pressure to contain the inflation rate. A rapid and more drastic than expected increase in the key interest rate would cause the US economic engine to stutter and, in the worst case, stall it. Then a recession is very likely – a condition that investors view with concern. Because in times of recession, not only are the GDP of a country, the consequences are more profound and include falling demand, falling production and rising unemployment, and the stock markets are also weak in times of recession.
Experts disagree on consequences of inverted yield curve
Whether an inverted interest rate curve is to be seen as a clear indicator of an impending recession is assessed differently by experts, despite the fact that the connections have been recorded in the past. “As the Fed moves into hawkish territory, the curve will reverse,” quoted CNBC Seth Carpenter, Morgan Stanley’s chief global economist. “As always in the past, markets will debate whether an inversion heralds a recession. A policy mistake causing a recession is clearly possible, but our baseline is that an inversion without a recession is more likely.”
Mislav Matejka, senior equity strategist at JPMorgan, is also giving the all-clear — at least for now: In a note to clients seen by Bloomberg, he said the length of time from a reversal in interest rates to a recession could be “very significant.” [zwei] years.” Stocks would often outperform bonds during this transitional period.
Meanwhile, Edward Al Hussainy, senior interest rate and currency analyst at Columbia Threadneedle, is more concerned: “When things turn around, you’re definitely a lot closer to recession than good, and that’s where we are today.” “It is clear that we have reached a point of tension in the markets,” Reutes quoted the expert as saying.
The situation will be exciting even without a recession
Even without a recession, the situation on the US bond market is likely to have consequences. The flat yield curve, or even an inversion of the same, shakes the construct that longer commitment means higher returns. The incentive for investors to take the risk of long-distance runners decreases enormously in this scenario.
In this environment, it is becoming more difficult for borrowers, especially companies, to refinance themselves, since bank loans are generally granted over a longer period of time. With a flat or inverted yield curve, banks, on the other hand, do not get money cheaply that they can pass on as loans at higher interest rates. This often leads to higher interest rates for consumers, such as small loans or mortgages.
Editorial office finanzen.net
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