Core view:
Recently, the 2S / 10s key US bond yield curve has been upside down for the first time since August 2019. Our analysis shows that the short-term spread inversion does not mean that a recession is coming. The spread inversion needs to last for several months to send a credible signal. Moreover, the current spread is distorted by the quantitative easing policy, the medium term premium of short-term interest rate and the high inflation risk premium. At present, the probability of recession in the United States is still low. The form of this round of table contraction is still passive and the speed will be faster. This round of table contraction is about equivalent to an additional interest rate increase this year. We estimate that the scale of table contraction is about US $400 billion to US $500 billion.
Research points:
At present, the short-term spread upside down does not mean that a recession is coming
The upside down of interest rate spread is regarded as an important leading predictor of the occurrence of U.S. economic recession. In previous cycles, the interest rate spread inversion often occurred at the end of the Fed's interest rate hike. This time, the interest rate spread inversion occurred shortly after the Fed began to raise interest rates. However, the current short interest rate spread inversion does not mean that a recession is coming. The main reasons are as follows:
\u3000\u30001. At present, the quantitative results of mainstream recession prediction models show that the recession risk is not large;
\u3000\u30002. The spread upside down needs to last for several months to deliver a credible signal;
\u3000\u30003. Quantitative easing lowered the long-term interest rate by about 80 to 90 basis points, making the interest spread upside down distorted;
\u3000\u30004. High inflation risk premium and real term premium in short-term interest rates also distort the upside down of interest spreads.
The form of this round shrinking table is still passive, and the speed will be faster
Under the most likely scenario, the accelerated pace of scale reduction may reach a maximum speed of $95 billion per month by the end of this year. According to Powell's news conference after the March meeting, this round of table contraction is about equivalent to an additional interest rate increase this year. We estimate that the scale of table contraction this year is about US $400 billion to US $500 billion.
Risk tips
Geopolitical risks exceeded expectations and inflation exceeded expectations
