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U.S. yield curve inversion may be ‘false positive’ recession signal


© Reuters. FILE PHOTO: This is a specialist trader working inside a New York Stock Exchange booth (NYSE) in New York City. It was January 18, 2022. REUTERS/Brendan McDermid/File Photo

(Includes the full title and name of the strategist.

NEW YORK (Reuters] – A U.S. Treasuries yield curvature inversion this year may not be a good predictor of a downturn. Credit Suisse (SIX) A strategist stated Wednesday that the Federal Reserve could place priority on decreasing inflation than economic growth.

The U.S. central banking’s plan to increase interest rates has seen short-term bond yields rise more than long this year. Flattening the curve

An inversion of the curve (especially the one that is determined by comparing 2-year Treasury bonds to 10-year Treasury bonds) has historically predicated recessions. The market had priced in possible rate reductions based on monetary policy moves that could harm the economy.

Jonathan Cohn, Credit Suisse’s trading strategist, said the curve has flattened but not near inversion. There is a 25% chance of recession within two years, however, economic conditions could stop the curve from predicting a slowdown.

“Contrary, to the past several periods where the curve inverted,” he stated.

The exacerbation of long-dated yields due to many factors such as excess savings “may encourage an environment where curve inversion might be more likely be a ‘false positive’ recession signal, and therefore leave inversion less reliable,” he stated.

The flattening of curves is being monitored by Fed officials, but they are not interpreting it as an iron law that can predict economic outcomes, chair Jerome Powell declared last week.

Fed officials also stated they would use a passive approach to shrinking the balance sheet. This is part of their plan to reverse years spent buying bonds to sustain the economy.

Cohn explained that while this decision would effectively ban the selling of U.S. Treasuries with a longer maturity, the Fed still has the ability to “ammo”, or steepen the curve. The Fed could reinvest bond proceeds in debt with a shorter term rather than cross the curve as it does currently.

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