In March 2022, the USD swap curve inverted, and by the end of August, the spread between the two- and ten-year maturities fell to -0.6% (see also the Alternative Credit Letter of April), suggesting imminent economic weakness.
In June, the Fed funds futures curve also reversed at the back end, pointing to a more dovish Fed stance by mid-2023. This uncertainty about the future path of interest rates is caused by increasing fears of a recession and a potentially faster cooling of inflation as a result of rate hikes. However, this interpretation may prove to be too optimistic, as the wage-price spiral may become a more dominant factor. In general, volatility at the short end of the curve has been particularly painful for short duration bonds, both in terms of interest rate and credit risk.