Yield Curve Considerations

The US yield curve fell to its flattest level since the crisis on Tuesday as Fed chair Powell dismissed the potentially recessionary signal. All currencies are down against the USD. GBP is the biggest loser on weaker than expected UK inflation, but with the headline CPI at 2.4% 00 well over the BoE target, the case for an Aug 2nd rate hike remains. The Premium DAX short was stopped out.

Not always recessionary but.

There is a raging debate inside the Fed about the implications of an inverted yield curve. Over the past half-century every inversion has triggered an interest rate cut by the Fed but not always a recession. On Tuesday, the difference between 10-year and 2-year yields fell to just 24 basis points. If the Fed hikes as anticipated, it will almost surely invert in the year ahead. Chapter 6 of Ashraf's book goes deeper in each of the yield curve inversions over the past 40 years. In it, Ashraf asserts that the inversion of 1998 did not lead to recession, but certainly predicted a series of Fed rate cuts in autumn of that year in light of the LTCM debacle. For traders, it is more important to be able predict rate cuts, or changes in the tightening cycle, than actual recessions.