The phenomenon of inversion of the yield curve is becoming more popular and popular on Wall Street.
After several weeks of constant narrowing of the spread between short- and long-term US government bonds, the strategists of the largest banks began to talk more and more about the possible inversion of the curve in developing forecasts for 2018 and beyond.
Now they get used to the idea that this phenomenon, which is often called a signal of a recession, may appear already in the next year.
Six of the 11 analysts surveyed by Bloomberg expect that the yield curve between two to 10 years can take an inverted form in the next 24 months, and four strategists do not rule out that this event will occur in 2018.
The yield curve is important. It was inverted (or when the long-term rate fell below the short-term rate) on the eve of each of the last seven US recessions.
In October, the president of the Federal Reserve Bank of Dallas, Robert Kaplan, said he did not want the interest rate on federal funds to be higher than the yield of ten-year treasury bonds.
In November, the head of the Federal Reserve Bank of Philadelphia, Patrick Harker, warned that the inversion of the yield curve “will not be a good thing.”
Experts predict that the yields will meet in the region of 2-2.5%, which corresponds to the range in which rates for 10-year securities were held during 2017.
“A strange combination of decent economic growth, pushing the Fed to tighten monetary policy, and, on the other hand, slow inflation contributes to the leveling of the curve.” Our investment forecast is further flattening in 2018, “said MUFG Securities Americas Inc. John Hermann.
Stable alignment of the curve has become one of the main topics on the $ 14.4 trillion treasury bond market in recent weeks: traders are speculating on what this could mean for monetary policy. One of the main drivers of this trend was a steady growth in the yield of short-term securities on the background of an increase in the market’s forecasts on the number of rate increases in 2018.
The yield of two-year Treasury bonds is 1.8% versus 1.25% in mid-September. The spread between the two- and 10-year securities, which was at the level of 125 basis points at the beginning of the year, on Wednesday was reduced to 50 basis points, or the minimum for more than 10 years of the level.