Yield curve indicates economic weakness, lower inflation

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.

Read more in our Alternative Credit Letter

Yield curve indicates economic weakness
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