18 to 24 March: The US Treasury market is rattled by the idea of a recession

By the end of the week, headlines on almost all major media outlets screamed that a recession in the US is imminent, as the Treasury curve inverted. Simply put, the yield on the 10-year US Treasury fell below the yield quoted on the 3-month bill – although only by a basis point. This phenomenon usually – but not always – predicts that a recession in the US is lurking around the corner. We do not want to downplay the significance of the yield curve’s inversion, but we are nowhere near a hundred per cent convinced that a recession is inevitable for the following reasons:

  • in the past, an inverting yield curve was not always followed by a recession,
  • the ECB and the BoJ are unable to exit from their QE programmes, which deter some capital flows to the US weighing on Treasury yields,
  • recent US macro data releases do not imply economic stagnation or a recession, in our view,
  • and most importantly, due to the Fed’s extremely bloated balance sheet, nobody actually knows whether pre-crisis and pre-QE rules and correlations still apply, i.e. if the yield curve’s steepness is a reliable predictor.

We sustain our view that the economic slowdown in the US is a normalisation from a somewhat overheated state and a decent real GDP growth is achievable this year. But of course, we continue to monitor incoming macroeconomic data closely. In conclusion, as long as rates in the US are low, the USD relatively weak and global economic growth is not meaningfully hurt, EM asset prices have convincingly strong reasons to rise. However, as long as the market is unconvinced that the growth story is not meaningfully derailed, it is likely that concerns can weigh on investor sentiment.

View All Global Market Updates

Subscribe to ourGlobal Market Updates

Error: Contact form not found.