The Inverted Curve Prophecy and Recession Nightmare

The curve of US government bonds is inverted, which means that they yield greater returns in the short term than in the long term. It’s a phase in the markets that always dreads when it occurs, and even on this occasion, analysts anticipate bleak scenarios that they associate with a recession. Antecedents don’t always blame them. What is an inverted yield curve? It’s a situation where long-term bonds (usually ten years) have lower yields than short-term bonds (typically two years). This causes the yield curve to have a negative slope and thus goes against what can legitimately be expected. Behavior has already opened, in the past decades, the doors of recession on the American economy. What comes when a central bank, in this case the Federal Reserve, intervenes by raising interest rates to curb inflation (in May, it reached 8.6% in the US), there is a risk of creating a vicious cycle that could happen leading to a recession, at which time it will The central bank cut interest rates. The Federal Reserve raised the cost of money by 75 basis points (0.75%), marking the largest increase since 1994. Expectations for a 50 basis point rate hike were not met precisely because of accelerating inflation. What analysts say they are divided in two. There are those who estimate a higher yield in the short term (up to more than 3%) by the end of 2023 and then a gradual decline to 2.7 in the following 24 months. This already indicates, at least in this case, that talk of stagnation is misplaced. If markets fear a recession, wage rates should approach zero, as they did in 2009 and 2020. Goldman Sachs is optimistic and estimates recession risks at 20-35% for the next year. Stock markets seem to be in agreement, to the point that the Nasdaq is indicating a bullish day and only in the past few hours the Dow has reported negative numbers (-0.62% as we write). Risks and Objections: Inflation is rising sharply, consumer confidence has collapsed, and GDP estimates have been slashed to less than 2%. These risk indicators should be contrasted with less hysterical risks. In 2020, the US crisis was badly spoiled by Covid and may not have been the result of the slight decline in the previous year’s curve. Charging the difficulties of 2009 to anything other than speculative credit bubbles may be correct but largely irrational. Time will give more comprehensive answers, considering that recessions usually follow 24-month curve reversals.

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