Living With Yield Curve Inversion
Comment of the Day

March 18 2022

Commentary by Eoin Treacy

Living With Yield Curve Inversion

Thanks to a subscriber for this report from Morgan Stanley which may be of interest. Here is a section:

US Rates | An inverted curve by design, not by conundrum We expect 2y,5y, and 10y yields to end 2022at 2.75%,2.50%, and 2.40%, respectively, and see inverted curves across the entire UST space. We think markets are learning to live with yield curve inversion, and not necessarily extrapolating it as a sign of recession, given (1) the market's willingness to price restrictive policy – a terminal rate above the neutral rate – consistent with an inverted curve, and (2) the significant distortions from pension demand, QE, and flight to quality, making the curve artificially flat. We think investors eventually will accept an inverted curve as a natural consequence of interest rate policy moving toward restrictive territory faster than balance sheet policy moves toward neutral territory. Discussions of an impending recession will continue, but we expect confidence in that view to wane over time.

Eoin Treacy's view

A link to the full report is posted in the Subscriber's Area. 

The US yield curve is exceptionally flat from 2-years out to 30-year. Earlier this week the 5-year traded above the 10-year. That was the first inversion of any part of the curve in this cycle. This is not the only measure that is beginning to signal signs of stress.

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