The recession is canceled: the US economy pleased with an unexpected indicator

The yield curve for government bonds, the inversion of which only recently foreshadowed the recession of the US economy, has now returned to its normal state and indicates that everything is in order - things are going very well in the country, even an acceleration of the economy is expected, writes CNBC.

Фото: Depositphotos

The difference between the yield of 2-year and 10-year bonds rose to 28,7 basis points on Wednesday, December 18, which is the highest level since November 2018.

“The economy as a whole is doing well, and trade tensions are not increasing. In such a situation, the yield curve will usually always be steeper, ”said Jan Lingen, head of analytics.

The escalation of the trade war between the United States and China, the slowdown in global growth and the weakening of US economic indicators prompted the Federal Reserve in 2019 to cut interest rates on loans and deposits three times in a row. This helped to deploy the inverted yield curve, bringing it back to normal.

The yield curve for government bonds in the United States was inverted in August 2019. An inversion occurs when the yield on long-term bonds falls below the yield on short-term bonds. The inversion of the yield curve is considered the most reliable indicator of the upcoming US economic recession. Normally, the yield on longer bonds is higher than the yield on short-term securities, since the risk of losses on investments for a longer period is higher than on a short one - investors require bonuses for this risk. When an inversion occurs, this may mean that investors see more risk in the short term than in the long term.

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Yields on 10-year bonds have grown by about 40 basis points since early October. Investors became even more optimistic about the future of the economy after the US and China reached an agreement to end the trade war. Therefore, now the yield curve has returned to its normal state and even predicts economic growth.

Nevertheless, the economy is far from the position where it was in the summer. An inversion of the yield curve led to a drop in the Dow Jones Industrial Average index by 800 points on August 14, showing the worst drop for the year.

At the same time, the likelihood of a recession in the next year fell to its lowest level since June. GDP growth is projected to remain at 2% over the next two years.

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