Inversion of key US yield curve slice is a recession alarm

• A key part of the yield curve inverted on Tuesday, as the 2-year U.S. Treasury note yield rose above the benchmark 10-year U.S. Treasury note yield for the first time since September 2019. An inversion of the two-year to 10-year (spread) part of the curve is viewed by many as a reliable signal that a recession is likely to follow in one to two years. 
• While the brief inversion in August and early September 2019 was followed by a downturn in 2020, no one foresaw the closure of businesses and economic collapse due to the spread of COVID-19. 
• Investors are concerned that the Federal Reserve will dent growth as it aggressively hikes rates to fight soaring inflation, with price pressures rising at the fastest pace in 40 years. Fed funds futures traders expect the Fed's benchmark rate to rise to 2.61% by February 2023, compared to 0.33% today. 
• Another part of the yield curve that is also monitored by the Fed as a recession indicator remains far from inversion. That is the three-month to 10-year (spread) part of the curve, which is currently at 182 basis points. Some analysts say that the curve has been distorted by the Fed's massive bond purchases, which are holding down long-dated yields relative to shorter-dated ones. 
• Short and intermediate-dated yields have jumped as traders price in more and more rate hikes. Meanwhile, analysts say that the U.S. central bank could use roll-offs from its massive $8.9Tn bond holdings to help re-steepen the yield curve if it is concerned about the slope and its implications.

(Source: Reuters)