Before the 3-month and 18-month US Treasury yield curves were on the verge of reversal, at the end of October, another carefully observed recession warning indicator appeared in 2020, the US Treasury yield curves. at 3 months and 10 years. for the first time in months.
The market is widely expected that the Federal Reserve will announce after its meeting on Wednesday, raising interest rates by 75 basis points for the fifth consecutive time. On the eve of the announcement of the decision to continue aggressive interest rate hikes, an indicator closely followed by Fed Chairman Powell and other Fed officials is close to sounding the alarm for a recession.
On Tuesday, November 1, Eastern Time, the spread between 3-month and 18-month US Treasuries narrowed once to less than 0.2 percentage points, on the verge of an inverted yield curve, far below the 2.7 percentage points in April this year. .
The so-called inverted yield curve refers to the fact that long-term US Treasury bond yields are lower than short-term US Treasury yields. The reversal is often seen by investors as a harbinger of an impending recession as markets begin pricing in the end of monetary tightening and accept the prospect that the Federal Reserve will lower interest rates in the future to mitigate the blow from the monetary tightening. economy downturn.
Prior to that, the yield curves of several carefully observed US Treasury interest rate portfolios had reversed, including the 2-year and benchmark 10-year US Treasury yield curves, which are often seen as indicators of recession. And the 3-month and 18-month Treasury yield curves are important in part because of Powell’s favor.
In his public statement from March this year, Powell sought to downplay the outside world’s emphasis on reversing the 2-year and 10-year US Treasury yields. When he answered questions during the event that month, he said:
Federal Reserve staff have done a lot of research on looking at short-term US Treasuries and the yield curve for the first 18 months. Explain 100% of the power of the yield curve. Does this make sense. Because if it goes upside down, it means the Fed will cut rates, which means the economy is weak.
Wall Street NewsIt was mentioned earlier that before the Fed announced a rate hike in July of this year, Powell pointed out that the 3-month and 18-month Treasury yield curves, which are indicators of economic recession, are sending a signal. warning and expectations for a sharp interest rate hike is weakening.
Coincidentally, not long ago, at the end of October, the 3-month and 10-year US Treasury yield curves reversed for the first time since March 2020.The analysis of the time highlighted thisthe New York Fed previously said that the combination of 10-year and 3-month Treasury rates has been very successful in predicting recessions in recent decades, and given the combination’s recession-forecasting ability, its reversal could help Fed to pause the current slightly increase the idea of the information process.
Frances Cheung, interest rate strategist at Oversea-Chinese Banking Corp. in Singapore, commented this week that the Fed’s key rate is entering economy-limiting levels amid some weak economic data recently. At some point, the Fed will have to reduce the magnitude of rate hikes, which could happen right at the Fed meeting in December.
The Chicago Mercantile Exchange (CME) Fed Watch Tool shows that the US Federal Funds Rate Futures market expects the Fed to raise interest rates by 75 basis points in November at noon Tuesday. The probability of raising interest rates by 75 basis points is close to 88%. The probability of 75 basis points is just over 50% and the 50 basis point probability of December of a rate hike is over 44 %.
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