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Is an inverted US Yield Curve signaling an upcoming recession?

Persephone ALCO meeting, August 2018

The US government yield curve is closely watched by market participants, particularly as the spread between long term and short-term US government bond yields is narrowing considerably since 2016 and the yield curve is currently nearly flat from 2 years onwards. FOMC policy makers and market participants project the short-term rates to rise through 2020 and fall thereafter which is the textbook case for an inversion.

Historically an inversion of the yield curve has been a strong signal for a coming recession, but Central Bankers have a mixed record of interpreting and acting on it.

 

Is this an early warning sign for worry even today and if so, when and how should we react? Or is it a strategic attempt by the FED to decelerate the US economy and stave off inflation pressure? What are the spillover effects and repercussion on the global economy?

 

Persephone manages investments directly or indirectly based on a strategic asset allocation derived from fundamental market analysis and research. A dedicated committee (ALCO) decides on changes to its strategic asset allocation in monthly committee meetings.

A key agenda point of yesterday’s regular ALCO meeting focused on growing recession concerns perceived in the market and expressed by committee members in previous ALCO meetings. Given the interesting insights and stimuli from the discussion, the ALCO unanimously agreed to publish the key charts on our website.

The attached presentation focuses on the changes of the US term spreads as a commonly used early indicator for economic downturn.

Please find here the excerpt of the ALCO deck as download.

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