Traders work on the trading floor of the New York Stock Exchange (NYSE) on August 28, 2024 in New York City, the United States.
Brendan McDermid | Reuters
while traders Watch Nvidia’s results on Thursdaybig things happened in the bond market. upside down spread The gap between 2-year and 10-year Treasury yields, considered a classic recession indicator, is close to normalizing.
In Thursday’s trading, 10-year return rate Less than 2 basis points below benchmark 2 years interest ratenarrowing the inversion that began in June 2022. (1 basis point equals 0.01%.)
2Y/10Y spread, 3 months
While a recession hasn’t happened yet, the end of the inversion doesn’t necessarily mean we’re out of the woods.
In fact, the yield curve typically normalizes before entering a recession as traders begin to price in the possibility that the Fed will have to start lowering interest rates in response to an economic slowdown.
The current market generally expects The Fed will start cutting interest rates in September and last until at least the end of 2025.
While the market pays closest attention to the relationship between 2-year and 10-year Treasury yields, the Fed is more focused on how the 10-year note compares to the 3-month note. As of July, the relationship showed a 56% chance of a recession over the next 12 months, according to the New York Federal Reserve, although that probability has been shrinking.
10-year and 2-year return rates
“The simple explanation behind this relationship is that too high the federal funds rate, which determines the 3-month Treasury yield, can lead to a recession. Since the 10-year yield is close to the market’s best guess at the neutral rate, as long as the Fed Keeping policy rates higher than those levels “contracts the U.S. economy,” Nicholas Colas, co-founder of DataTrek Research, said in a recent market report. “If this is true, the U.S. economy currently faces a significant risk of an imminent recession. “
However, Colas also pointed out that recessions often require some unusual events, such as a surge in oil prices or a financial crisis. No crisis, no recession.
“However, this does not allow the Fed to cut interest rates in the next 12 months, and the market knows this,” he added. “While futures expectations of the Fed cutting rates at every meeting next year may seem a bit aggressive, it does fit with the idea that the Fed needs to normalize monetary policy for the foreseeable future.”
