Several central banks have hiked rates and are talking about the need to do more, even as most global growth and inflation measures decelerate year-over-year. The market’s response to that divergence has resulted in more inverted yield curves. Historically, yield curve inversions have been a useful indication that some version of an economic slowdown is ahead. Over the last few months, we have seen front-end rates move higher as policy rates increase while long-end rates move lower as the prospects for longer-term real economic growth decline.
Starting in the United States, the 2y10y curve has been inverted since July 2022, around the timeframe that most growth and inflation measures began to decelerate on a y/y basis. Before the bank failures in March, the inversion had reached -107 basis points. Following those bank failures, expectations for rate cuts increased, front-end rates declined, and the curve steepened. Moving to today, market expectations for rate cuts have reversed and the curve has gone back to flattening. The takeaway here is that even with the March volatility in Fed Funds futures, front-end rates falling, and the curve steepening, the 10-year remains below its March level. This is an indication that long-term expectations for real economic activity continue to be weak, even as front-end rates move up or down on Fed rate policy expectations.
Source: Macrobond.
For some historical context around the depth and duration of the current inversion, we have to look to the early 1980s. Eventually, inverted curves can cause structural issues for lending activity and therefore credit growth more generally. We believe we have not seen the full impact of the current inversion period yet, but will continue to monitor markets, lending surveys, and commercial bank commentary.
Source: Macrobond.
It is also important to note that this is not just a U.S. phenomenon. We have seen yield curve inversions in other countries where central banks maintain a similar policy stance as the Fed.
- European Central Bank
Source: Macrobond.
- Bank of England
Source: Macrobond.
- Bank of Canada
Source: Macrobond.
- Reserve Bank of Australia
Source: Macrobond.
While policy rate expectations remain uncertain, long-term prospects for real economic activity have continued to weaken globally. The synchronicity of these inversions likely points to further decelerations in global growth and inflation measures moving forward.
The views expressed herein are presented for informational purposes only and are not intended as a recommendation to invest in any particular asset class or security or as a promise of future performance. The information, opinions, and views contained herein are current only as of the date hereof and are subject to change at any time without prior notice.
Senior Economic Analyst
Boyd Watterson Asset Management, LLC