Yield Curve Inversion Vies With Speculation On Jackson Hole To Predict Fed Actions
Darrell Delamaide | Aug 23, 2022 04:26AM ET
- Yield curve inversion deepens, heralding imminent recession
- Fed minutes show commitment to fight inflation but unclear on pace of rate hikes
- European bond yields rise as ECB faces rising inflation
The inverted yield curve on US Treasuries—which deepened on Monday and is an incontrovertible fact—is vying for investor attention with speculation about what Federal Reserve Chairman Jerome Powell will say at the Jackson Hole symposium on Friday.
The gap between yields on the two-year and 10-year Treasury notes reached more than a minus 30 basis points at one point on Monday, indicating a big recession is looming or is already upon us.
Speculation about how hawkish Powell will be in his speech is just speculation. Investors took the decline in the consumer price index (CPI) earlier this month as a sign that bear-market trap.
European bond yields tell a less ambiguous story as inflation continues to rise and only the prospect of recession seems likely to check further monetary tightening by the European Central Bank.
Yield on Germany’s benchmark 10-year bond was up more than 4 bps to 1.30% as Deutsche Bank economists forecast it reaching 1.75% over the next few months as the ECB hikes rates.
Italy’s 10-year bond yield, meanwhile, rose 8 bps, widening the spread with the German bonds at one point to 229 bps. The prospect of a right-wing alliance winning control of the government in the September 25 snap election and defying European Union limits on deficits has led to weakness in Italian bonds.
Yields on UK gilts also rose sharply in Monday trading, tacking on 15 bps from lows to close at nearly 2.53%. Citigroup forecast that UK inflation could top 18% by January amid exploding energy costs.
In general, the European energy situation continues to worsen as Russia warned that it would halt natural gas deliveries via the Nord Stream 1 pipeline for three days at the end of August.
Isabel Schnabel, a German member of the ECB executive board, told Reuters last week that there was no sign that the central bank’s surprise 50 bps rate hike in July has halted rising inflation, as the governing council debates whether to hike its policy rates another 50 bps in September or go to 25 bps.
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