An inverted yield curve is often seen as a signal that investors are more worried about the immediate future than the long term, causing interest rates on short-term bonds to rise relative to those paid on long-term bonds.
Although the curve has not yet reversed, it is getting closer. This shouldn’t be particularly surprising, given that Russia’s invasion of Ukraine – and its economic ramifications – continues to weigh heavily on the global economy.
Treasury bills are essentially a loan to the US government and are generally considered a safe bet for investors because there is little risk that the loan will not be repaid.
These government bonds have attracted a flurry of interest in recent weeks amid geopolitical uncertainty and tightening of financial conditions – the Federal Reserve said last week that it was considering up to six more rate hikes in 2022 alone. This is causing investors to lose their appetite for stocks and other more volatile assets and turn to reliable investments like treasury bills.
A 10-year treasury bill generally offers a higher rate of return than shorter-term notes because an investor’s money is committed longer. Shorter duration treasury bills, such as 2 or 3 year bonds, generally offer lower yields because the risks are more predictable than longer duration. temporary horizon.
A reversal does not mean that stocks are about to crash: while a reversal usually indicates that a recession is approaching in the following 12 months, it can sometimes take years. The curve inverted in 2005, but the Great Recession didn’t start until 2007. The last inversion, in 2019, raised fears of a recession – which materialized in 2020, but was due to Covid- 19.
Be that as it may, some market players are sounding the alarm.
“I think there could very well be a recession or even worse,” activist investor Carl Icahn said in an interview with CNBC on Tuesday. “We have a solid hedge against long positions…short term, I’m not even planning.”
“The harder the Fed brakes, the higher the likelihood of the car crashing and the economy going into recession,” Zandi said.