The yield curve on government bonds, inversion which has recently heralded the recession of the US economy, has now returned to its normal condition and indicates that everything is in order — things in the country are very good, even expected acceleration of the economy, writes CNBC.
The difference between yields on 2-year Treasury bond and the yield on 10-year bonds rose to 28.7 basis points on Wednesday, December 18, the highest level since November of 2018.
“The overall economy is doing well, and trade tensions is not increased. In such a situation, the yield curve usually becomes more steep,” said head analyst Ian Lyngen.
Escalation of a trade war between the US and China, slowing global growth and the weakening of the U.S. economic indicators prompted the Federal Reserve in 2019 to reduce interest rates on loans and deposits three times in a row. This helped to deploy the inverted yield curve, bringing it again to normal.
The yield curve on government bonds in the United States was inverted in August 2019. Inversion occurs when the yield on long-term bonds is below the yields on short-term bonds. The inversion of the yield curve is considered the most reliable indicator of a forthcoming economic recession in the United States. Normally, the yield of longer bonds is higher than the yield of short-term securities, because the risk of loss when investing in a longer term are higher than short — investors are demanding bonuses for the risk. When inversion occurs, it may indicate that investors see more risk in the short term than in the long term.
The yield on 10-year bonds increased by about 40 basis points since the beginning of October. Investors have become more optimistic about the future of economy after the US and China reached an agreement to end the trade war. So now, the yield curve returned to its normal state and even predicts the growth of the economy.
Nevertheless, the economy is far from where it was in the summer. The inversion of the yield curve led to a drop in the Dow Jones Industrial Average index 800 points on 14 August, showing the worst drop in a year.
The probability of a recession in the next year fell to its lowest level since June. It is projected that GDP growth will remain at 2% over the next two years.