It is only the third time in 21 years, the first since 2019, that such a “reversal” has occurred.
The average yield on 2-year US government bonds briefly rose above the 10-year rate on Tuesday, a rarity that many investors and economists see as a harbinger of a medium-term US recession.
It is only the third time in 21 years, the first since 2019, that such a “reversal” has occurred. The 10-year interest rate is most often higher than the 2-year return because committing to a longer term presents more risk.
This phenomenon is closely followed by the markets, in particular since the work of the Canadian economist Campbell Harvey raised, in 1986, the hypothesis that it was the harbinger of a recession.
The researcher had however compared the rate at 3 months to that at 10 years, which are currently very far from an inversion.
The last eight recessions that the United States has experienced have all been preceded by an inversion of the yield curve. The latter is established by linking, on a graph, all the rates of the shortest maturities (a few months) to the longest (30 years).
With the inversion, instead of going up, the curve goes down, a sign that the short rates are higher than the long rates.
On Monday, the 5-year rate had risen above the 30-year yield for the first time since 2006. On Tuesday, the ratio between the two turned positive again before stabilizing around zero.
“The countdown to recession has begun,” responded Edward Moya, an analyst at Oanda, in a note, “but growth should still be sustained at least in the coming quarters.”
The theory goes that with this reversal, the market signals that it is less confident in long-term economic growth than in the short term. He thus envisages a recession in the medium term, which would force the American Central Bank (Fed) to lower its rates.
“It could take eight months to two years” before the US economy actually experiences a recession, “it’s really very long,” said Tom Cahill of Ventura Wealth Management.
In addition, the fact that the reversal lasted only a few seconds tends to relativize its scope, believes the analyst. “If it was for a month…”
“There is still room for the markets to rise between now and a recession, if the Fed (American Central Bank) makes a forced landing for the economy”, tempers Tom Cahill.
“What can prevent a recession after a reversal,” said Chris Low, chief economist at FHN Financial, “is a change in the path of the Fed, not raising rates as much as expected or lowering them after picked them up.”