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Recession Fears Mount As U.S. Treasury Yield Curve Stays Inverted For Second Straight Day

continued yield curve inversion
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EDITOR'S NOTE: Treasury yield curve inversions tend to be viewed as reliable recession indicators. The article below focuses on the 2-year and the 10-year curve which inverted again yesterday as investors price in the chance that the Fed’s efforts toward reining-in inflation may actually push the economy into recession. Remember that yield curves plot the returns on Treasury securities and that they typically slope upward as payouts increase over time. A steepening curve indicates expectations of a stronger economy, higher inflation, and higher interest rates while a flattening curve indicates expectations of near-term interest rate hikes and lower economic growth. An inverted yield curve indicates recession. On a practical level, higher short-term rates also affect businesses, as banks often raise benchmark rates for commercial and consumer loans, making it expensive to borrow money. This, in turn, slows spending and growth. Aside from the fact that the current economic conditions may be seen to stem immediately from recent triggers, the pre-condition of the current inflation and the “everything bubble” that has now burst goes back to our initial warnings in 2016. We advocated gold and silver as appropriate hedges for such a scenario. Despite the recent downturns in both metals, gold is still up over 60% and silver is up 33% since the time we published our outlook. Both metals are poised to rise as mainstream investors find there may be no safe places left to hide from the current downturn.

LONDON, July 6 (Reuters) - A key part of the U.S. Treasury yield curve stayed inverted for a second straight day on Wednesday, in a sign of growing angst in the world's biggest bond market over recession risks. In London trade, the gap between two-year and 10-year yields was at -1.3 basis points, having dropped into negative territory for the first time in three weeks on Tuesday.

An inversion of this part of the Treasury curve is viewed as a reliable indicator that a recession is looming, usually 18-24 months down the line.

The two-year, five-year part of the curve, which on Tuesday inverted for the first time since Feb. 2020 -- another indicator an economic downturn is likely -- also stayed inverted .

While data on Tuesday showed a rise in new goods orders, most prints hint at steady growth deterioration, including the Institute for Supply Management's factory activity index which on Friday showed a second week of contraction.

"Inversion has been a recession indicator but I wouldn't reach too much into it. (Federal Reserve chief) Powell has also made similar comments on this," said Pooja Kumra, European rates strategist at TD Securities in London.

"What will be key is how the labour data develops, given that we are seeing a weakening in consumer sentiment."

Having risen sharply in the first half of this year, Treasury yields have tumbled in recent weeks as investors fret that the Federal Reserve's aggressive rate hikes to fight soaring inflation will send the U.S. economy into a recession.

U.S. 10-year yields were last at 2.795%, little changed on the day, but down from highs around 3.5% hit in June.

Two-year Treasury yields were at 2.804%, also little moved on the day.

Expectations of where U.S. interest rates might peak have also declined. Futures expiring in June 2023 see rates at 3.14%, compared to more than 4.1% priced before the Fe's mid-June meeting, and down from 3.5% last week..

Minutes of the June meeting, where interest rates were raised by 75 bps, are due later in the day.

Breakeven inflation on 5-year U.S. inflation-linked treasury notes fell to its lowest since September 2021 at 2.502%. (Reporting by Dhara Ranasinghe; Editing by Saikat Chatterjee)

Originally published on Yahoo Finance.

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