Treasury Yields, Inverted Yield Curve Seen as Potentially Good Economic News

11/29/2022 CUToday

WASHINGTON–There may be some good economic news in U.S. Treasurys and the inverted yield curve.

Yields on longer-term U.S. Treasurys have fallen further below those on short-term bonds than at any time in decades, an indicator investors believe the Federal Reserve is close to winning its inflation battle regardless of the cost to economic activity, according to the Wall Street Journal.

As the Journal noted, yields on Treasurys largely reflect investors’ expectations for what short-term interest rates set by the Fed will average over the life of a bond.

But as the publication added, “The yield curve is more than just a little bent out of shape at the moment.”

Large Negative Gap

Last week, the yield on the 10-year U.S. Treasury note dropped to 0.78 percentage point below that of the two-year yield, the largest negative gap since late 1981, at the start of a recession that pushed unemployment even higher than it would later reach in the 2008 financial crisis, according to the Journal.

“Still, many investors and analysts see reasons to think that the current yield curve may presage waning inflation and a return to a more normal economy, rather than an approaching economic disaster,” the report stated.

Gene Tannuzzo, global head of fixed income at the asset-management firm Columbia Threadneedle told the Journal, “The market is saying: I think inflation is going to come down.”

Signs of Cooling Inflation

As CUToday.info has reported, inflation remains near a four-decade high, but the yield curve has become more deeply inverted in recent weeks due largely to good economic news, the Journal added.

In recent months there has been better-than-expected consumer price index numbers, indicating inflation may be slowing.

The Journal reported most investors still expect the central bank to raise the fed-funds rate to about 5% by early next year, up from its current level between 3.75% and 4%, before starting to cut rates later in 2023.