A closely watched recession forecast in the bond market flashed red, sparking fresh concerns that the US economy is on a recessionary path this year as a result of the Federal Reserve’s war on inflation.
The spread between the 2-year and 10-year Treasury yields for the first time since April reversed fears that the Federal Reserve’s aggressive approach to tackling the hottest inflation in four decades could lead to a sustained slowdown in growth. The event – which is rare – has been a historically accurate predictor of recessions.
The yield on the 2-year Treasury note climbed as much as 3.431% during morning trading on Tuesday, rising above the 30-year bond to fall to nearly 3.277%. According to Mark Hackett, head of investment research nationwide, the movement reflects “Feed policy error and fears of an impending recession.”
The inverse of the yield curve is seen as a good recession predictor because it shows that investors believe – interest rates on longer-term bonds are lower than the rate of short-term bonds – slowing economic growth. Is. Every recession in the past 60 years was preceded by an inverted yield curve, according to Research From the Federal Reserve Bank of San Francisco.
There are growing fears on Wall Street that the US central bank will trigger a recession as it raises interest rates at the fastest pace in two decades, following a heated Labor Department report released last week on the Consumer Price Index in May. increased by 8.6%. Faster than expected, from a year ago. This marks the fastest pace of inflation since December 1981.
Disappointing inflation reports upset investors and prompted traders to revise their expectations for a Fed rate hike this year. Wall Street banks Barclays and Jeffries are now predicting a 75-basis point increase — the first since 1994 — at the conclusion of the Fed’s policy-setting meeting on Wednesday. Most traders — about 96% — also saw mega-sized rate hikes this month, according to CME Group’s FedWatch tool, which tracks trading.
“The US central bank now has good reason to surprise the markets by moving more aggressively than expected in June,” Barclays strategists wrote in a note on Friday. “We realize this is a close call and it could play out in June or July. But we are changing our forecast to call for a 75-basis point hike on June 15.