US yield curve inversion signals possible recession

April 2, 2022| Bank of Valletta| MALTA

There are concerns that the world’s largest economy is set to fall into recession. 

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A closely watched feature of the US Treasury yield curve inverted last Tuesday, sparking concerns that the world’s largest economy is set to fall into recession. The two-year US Treasury yield briefly rose above the benchmark 10-year yield for the first time since September 2019, inverting a portion of the yield curve.

Inversions are closely monitored by Wall Street and policymakers as they typically signal malaise about the economy’s long-term growth prospects and have preceded every US recession in the past 50 years.

Short-term yields rose lately as the Federal Reserve started to tighten monetary policy in an attempt to tame inflation, which has soared to its highest level in four decades. Policy­makers have signalled that they are ready to raise interest rates, possibly as many as six in 2022.

Separately, the mood of consumers in Germany has darkened significantly as the Russian invasion of Ukraine dimmed the outlook for Europe’s largest economy, according to a closely watched survey published on Tuesday. Pollster GfK’s forward-looking baro­meter dropped to -15.5 in March from a revised reading of -8.5 in February.

Economists had expected a reading of -14. The downward trend in the headline index continued and a sharp increase in the propensity to save in March further reinforced it, the agency added. The impact of sanctions, high energy costs and supply chains broken by the outbreak of the war means “the risk of a recession has risen sharply,” the pollster said.

Finally, UK mortgage approvals unexpectedly ticked down in February, data from the Bank of England (BoE) showed on Tuesday. Approvals for house purchases, an indicator of

future borrowing, fell to 71,000 in February from 73,800 in January. Economists had predicted approvals to rise to 74,850. However, the February figure sits above the pre-pandemic average of 66,700 in the 12 months to February 2020.

BoE figures also showed the average annual growth of consumer credit accelerated to 4.4 per cent in February from 3.2 per cent in January.

“The annual growth rates of credit card borrowing, and other forms of consumer credit were 9.4 per cent and 2.4 per cent respectively,” the central bank added.

This article has been prepared by Bank of Valletta plc for general information only.