New York Fed-Backed Yield Curve Is Set to Invert by September
Comment of the Day

June 30 2022

Commentary by Eoin Treacy

New York Fed-Backed Yield Curve Is Set to Invert by September

This article from Bloomberg may be of interest to subscribers. Here is a section:

At the end of May, the latest available data, the New York Fed’s recession gauge showed only a 4% probability of an economic contraction in the next 12 months. But if the forward market has it right, the model will signal a surging odds of a downturn soon enough. According to the New York Fed, the yield curve has predicted essentially every US recession since 1950 with only one false signal in 1967.

In the underlying spot market, the 10-year yield is still more than 100 basis points above Treasury bills -- but traders in the forward market expect interest rates will be hiked into restrictive economic territory before the year is out. 

Fed fund futures suggest Powell will raise borrowing costs by a total of about 125 basis points in July and September to close to 3%, around the highest since 2008. 

The predictive ability of the yield curve has stirred debate, and Powell has downplayed its significance. In March, he noted the metric he was more inclined to look at is the difference between bets on where the three-month rate will be in 18 months’ time and that same rate today.

Eoin Treacy's view

The simple message from the bond market is if the Fed follows through on raising rates by another 175 basis points a recession is inevitable. Then comes the job of pricing in whether that is in fact likely.

Click HERE to subscribe to Fuller Treacy Money Back to top