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Economic Outlook: Difference between revisions
→1. Yield Curve
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# If investors see greater risk of recession, they will attribute higher value to short-term assets that they can easily liquidate to finance spending on goods and services. Hence, they will require higher compensation to keep holding long-term securities. This means a yield curve inversion in this escenario is an expectation of lower odds of a recession. | # If investors see greater risk of recession, they will attribute higher value to short-term assets that they can easily liquidate to finance spending on goods and services. Hence, they will require higher compensation to keep holding long-term securities. This means a yield curve inversion in this escenario is an expectation of lower odds of a recession. | ||
Due to these contradictory reasons, not all yield curve inversion will signal a recession, thats why is important to understand the current | Due to these contradictory reasons, not all yield curve inversion will signal a recession, thats' why is important to understand the current enviromnent we are in and the sentiment among inversions. Since several surveys has been done recently already, especially the latest Philadelphia Fed survey of professional forecasters shows the probability of a recession in the next year is the highest in the 50+ years this survey has been conducted<ref>https://www.philadelphiafed.org/surveys-and-data/real-time-data-research/spf-q4-2022</ref>, we can conclude thantthis time investors are pricing in higher odds of a recession in the yield curve inversion. | ||
What is the current data telling us? | What is the current data telling us? | ||
# The 10Y2Y spread<ref>https://fred.stlouisfed.org/series/T10Y2Y</ref>: Current inversion around is -70 bps, worst level | # The 10Y2Y spread<ref>https://fred.stlouisfed.org/series/T10Y2Y</ref>: Current inversion around is -70 bps,the worst level sincethe 1980s, the coninuning inversion started on July 2022. | ||
# The 10Y3M spread: Current inversion around -80 bps, worst level since the data is available, the contuining inversion started on October 2022. | # The 10Y3M spread<ref>https://fred.stlouisfed.org/series/T10Y3M</ref>: Current inversion around -80 bps, worst level since the data is available, the contuining inversion started on October 2022. | ||
# Majority of the yield curve is inverted at this moment, this condition has always preceded a recession <ref>http://www.worldgovernmentbonds.com/country/united-states/#:~:text=The%20United%20States%2010Y%20Government,last%20modification%20in%20December%202022).</ref> | # Majority of the yield curve is inverted at this moment, this condition has always preceded a recession <ref>http://www.worldgovernmentbonds.com/country/united-states/#:~:text=The%20United%20States%2010Y%20Government,last%20modification%20in%20December%202022).</ref> | ||