The true meaning and future expectations of an inverted yield curve

Inverted Yield Curve: Meaning and Future Expectations

Macro and digital asset consulting firm Asgard Markets’ researcher Alex Krüger has released a report discussing the issue of inverted yield curve and emphasizes the importance of considering a broader context before interpreting it as a signal of economic recession.

Historically, the inverted yield curve has been accurate in predicting economic recessions, although it has performed poorly in terms of timing when the recession will occur. In addition, the 2/10-year yield curve is currently severely inverted and has been for about a year. However, contrary to popular belief, this does not necessarily mean a large-scale recession is imminent.

We believe that the current inversion is mainly driven by expectations of normalizing monetary policy and low long-term real yields, as well as sustained demand for long-term assets from pension fund investors. Therefore, the current inversion may be producing incorrect signals. As we have previously reported, even in the most likely scenario of a small and short-lived economic downturn, this recession will be small enough to not have a significant impact on risk assets. In fact, given the negative sentiment of market participants, the main risk in the second half of 2023 is overheating of the economy rather than a severe recession.

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We want to emphasize that although the curve is extremely inverted, it will start to steepen before the end of the rate hike cycle. Therefore, if you, like us, believe that the Fed has completed about 90% of its rate hikes, now is the best time to make steep trades (betting on the curve to tilt upwards).

Reference: https://twitter.com/krugermacro/status/1679072024726228992

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