Nearly two-thirds of Reuters strategists say the U.S. bond market's recession indicator is unreliable. Many analysts' recession prediction models use a prolonged negative difference between 2-year and 10-year U.S. Treasury yields, which has occurred in nearly all recessions since 1955. One false signal occurred during that time.
The yield curve has been inverted for over 20 months, currently by 46 basis points, but markets have focused on the likelihood of no recession or a resurgence in economic growth. In a March 6-12 Reuters poll of bond market analysts, 22 of 34 thought the yield curve's forecasting effectiveness had declined.
"I feel the inverted yield curve is just not as good an indicator as before," said Penn Mutual Asset Management portfolio manager Zhiwei Ren. "If you have these two things going on together - insatiable demand for the long-end from real money like pension funds and the Fed keeping front-end rates higher because of the resilience of the economy - the curve will stay inverted for a while."
Since the 2007-2008 global financial crisis, the Federal Reserve has aggressively bought Treasury securities as part of its stimulus package, increasing its market share.
This ownership has been criticized for distorting market pricing in previous years, but strategists interviewed to analyze the new survey results did not cite "quantitative easing" as a rationale. "The difficulty this time is that the policy rate is more than double the fed (funds rate's) longer-run equilibrium, and the magnitude and speed of rate hikes have contributed to the inversion," said HSBC global head of fixed income research Steve Major.
Financial markets have aggressively reduced predictions on when the Fed will cut rates this year, from March to May and now to June. This has caused some experts to raise their 12-month projections for the rate-sensitive 2-year Treasury note yield to 3.68%, up 21 basis points from one month earlier.
The 10-year Treasury note yield, presently 4.10%, was anticipated to fall 19 basis points to 3.91% by August and 3.75% in a year by 60 experts. "Disinverting" the curve demands sharp short-term yield drops or higher long-term yields.
The Fed must decide when to reduce, pause, and stop dumping securities from its massive "quantitative tightening" program. When asked when the Fed will slow its balance sheet shrinkage, 14 of 26 said June. March–December responses were given. Seventeen of 26 said the Fed will stop tapering in quarter one 2025.
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