A closely watched recession signal flashed red on Tuesday as investors worried that the Federal Reserve’s efforts to curb inflation would lead to a sharp slowdown in U.S. economic activity.

Two-year U.S. Treasury yields rose above 10-year yields for the first time since August 2019, inverting part of the yield curve closely watched by Wall Street and policymakers. Inversions typically signal dissatisfaction with the economy’s long-term growth prospects and have preceded every U.S. recession in the past 50 years.

Typically, a recession occurs within two years of an inversion of this indicator. yield curve.

The two-year yield, in line with rate expectations, was as high as 2.45%, the highest level since March 2019.The two-year yield is up 1.64 percent this year, including its first rate hike To combat inflation at 40-year highs since 2018.

The 10-year Treasury yield, which moves with inflation and growth expectations, fell to a low of 2.38%. Benchmark yields have also risen this year, albeit at a slower pace, as Fed tightening has dampened inflation and growth expectations.

After the inversion, the gap widened rapidly and the yield curve turned positive again, hovering around 0.02 percentage points. At the beginning of the year, it was 0.77 percentage points.

Another measure of the yield curve, the difference between five-year and 30-year Treasury yields, inverted on Monday for the first time since 2006.

However, investors believe this inversion may not be as reliable a recession indicator as the Fed’s massive bond purchases during the coronavirus crisis have skewed yields.

“The inverted yield curve is a worrying factor for the market,” said Gennadiy Goldberg, U.S. rates analyst at TD Securities. However, he noted that these inversions “could also be distorted by the massive Covid quantitative easing program by the Fed”.

As part of its intervention in financial markets during the March 2020 market crash, the Federal Reserve began buying large amounts of U.S. government debt to prop up the economy. As the central bank ended its $120 billion-a-month bond-buying program this month, a flood of U.S. Treasuries flooding the market pushed prices lower and yields higher.

expect to have Increase The Federal Reserve will accelerate the pace of monetary policy tightening, with investors expecting the Fed to raise interest rates by half a percentage point as early as its May meeting.Central banks typically move in 25 basis point increments, as they did earlier this month, but rising inflationary pressures add more risk radical action.

Some officials have also suggested that interest rates this year need to be above a so-called neutral level that neither helps nor hinders economic growth, which is expected to be 2.4 percent.

The impact of Fed intervention could mean this yield curve inversion is driven by market technical factors rather than economic fundamentals.

Traditional signs of an economic slowdown are also yet to emerge.U.S. economy last year It grew at its fastest annual pace since 1984 as it rebounded from a pandemic-driven recession that lasted into the first two quarters of 2020. The labor market has also rebounded, reporting strong job growth in recent months.

Unhedged – Markets, Financials and Strong Opinions

Robert Armstrong dissects the most important market trends and discusses how the best minds on Wall Street are responding to them.register here Get the newsletter straight to your inbox every business day