In the American yield curve, the difference between 2-year and 10-year maturities has declined below 6 points. The horizontal yield curve is still at what is called the threshold for recession. Considering the current state of the yield curve, a mismatch has emerged with the spread between the 3-month Treasury bill and the 10-year Treasury bond yield indicated by the Fed. While Powell finds the probability of recession low by looking at the 3-month - 10-year spread, the criticisms are that the correct indicator is not looked at and the possibility of recession appears in other spreads.
If we take a look at what we have said about it; I quote from the March 24 Macro Perspective:
“In the normal yield curve, short-term interest rates are smaller than long-term interest rates, and the slope of the curve is upwards. Academic research has often used the difference between the yield on a ten-year Treasury bill, which reflects the long-term view of bond investors, and the yield on a quarterly Treasury bill, which is a close substitute for the targeted federal funds rate. On the other hand, commentators and policy makers also make heavy use of the difference between ten- and two-year returns. The trend in bond yields is influenced by monetary policy views. If long-term interest rates fall below short-term rates, it may also reflect the FOMC's expectation that aggressive monetary policy tightening that will push current rates higher than future rates will increase the likelihood of a future decline in economic activity. Therefore, such movements in the yield curve will be associated with a higher probability of recession in the future.”
Historical 3-month Treasury bill yield - 10-year Treasury note spread and 2-year - 10-year Treasury bond yield spread. Source: Bloomberg
On the other hand, as the statements from the peace talks in Turkey increased the hopes of the markets, there was a decline in commodities such as oil. It is stated that Ukraine is close to an agreement not to join NATO and not to have foreign bases in the country. Sanctions against the Putin administration will remain uncertain for a while. It is good news for the market that the military activity around Kyiv will decrease.
Major market fears are turning to war and the possibility of a 50 basis point rate hike from the Fed in May. The intensity of optimistic or inflationary expectations from the US data seems to support the upward movement in bond yields for a while.
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