Inversion of the yield curve in the stretch between 5 and 10 years: we are talking about it in the last few hours, following the announcement of the Fed by Jerome Powell who, for the first time since 2018, raised the rates on fed funds . Rates were raised by 25 basis points to the new range between 0.25% and 0.50%.
In reality, the spread that interests most when addressing the question of the inversion of the yield curve is that between 2-year Treasury rates and 10-year rates.
In the event that 2-year rates rise above 10-year rates, we speak of an inversion of the curve, as a factor that, historically, precedes a recession in the United States.
In fact, this spread has narrowed, and has been traveling below the 30 basis point threshold for a while.
The part of the yield curve that has inverted is the one that goes from five to 10 years.
Furthermore, the inversion has already manifested itself since last Friday, therefore before the announcement of the Fed yesterday, when the value of 7-year US bond rates exceeded that of 10-year rates: 7-year rates rose in fact up to 2.197%, compared to 2.177% for ten years.
Interviewed by Marketwatch, Michael Franzese, trader of the fixed income market at MCAP, explained the inversion with the phenomenon of “convexity hedging”, or with those activities of dealers and market makers who hold and sell assets guaranteed by mortgages aimed at offset risks through the sale of Treasuries.
Derek Tang, an economist at Monetary Policy Analytics in Washington, however, recalled that it is at least 2009 that the curve of the 7/10 year section has not reversed in a lasting way.
Having said that, the comment by Peter Schiff, chief economist and global market strategist of Europac.com and president of SchiffGold.com, is indicative, who on Twitter launched a series of alerts on the fight against inflation which is too weak which, in his opinion warning, Jerome Powell’s Fed would have just launched (as rates still remain close to zero).
“The yield curve has now reversed in the 5 to 10-year stretch, which means that five-year Treasuries now yield more than 10-year bonds. This shows that those who invest in the bond market have not yet understood. . It is good to think that the economy is sliding into a recession, but wrong to think that this means that inflation will go away! “.
Basically, Schiff fears the risk of a stagflation in the United States.
At 3.30pm Italian time, 10-year Treasury rates turn around, falling to 2.156%, after having jumped up to 2.24% yesterday, a new record since 2019. Currently, 5-year rates are traveling at 2.136%, while those two-year at 1.922%, confirming the fact that the 2-10-year spread remains under control and also that between 5 and 10-year rates is back to normal, after having reversed (based on what he pointed out Peter Schiff).