Will the US yield curve invert further?
The gap between short- and long-term US government borrowing costs this week reached its widest point since the banking turmoil in March, a spread which may widen further next week as investors coalesce around the view that the Federal Reserve will keep interest rates higher for longer.
The US yield curve — which measures the difference between two- and 10-year Treasury yields — reached a three-month low on Friday of minus 97 basis points. This pattern, known as an inverted yield curve, is closely watched because it has preceded every US recession in the past 50 years. The curve has been inverted since last year.
Two-year yields move with interest rate expectations, while 10-year yields move with growth and inflation. So when investors see higher interest rates crushing economic growth, the yield curve inverts. The depth of an inversion does not indicate the severity or length of a recession, but it does suggest increasing conviction in the market that the Fed’s rate-hiking will hamper economic growth.