US, UK, Germany Yield Curves Invert, a Harbinger of Disaster?

The "inversion" of the long and short-term bond yield curve is being resolved globally.

As major central banks around the world enter a cycle of easing, UK government bonds saw their yield curve turn positive for the first time in July this year, followed by US Treasury bonds a month later, and the inversion of the yield curve for German and Canadian government bonds has also come to an end.

Alberto Gallo, Chief Investment Officer and Founder of Andromeda Capital Management, said: "The steepening of the yield curve is a global phenomenon, which may be more pronounced in the United States."

The Federal Reserve began its rate-cutting cycle with a 50 basis point cut, boosting expectations for further rate cuts in the future.

Short-term bond yields, which are more sensitive to interest rate policies, continued to fall, pushing the yield curve steeper.

Despite Federal Reserve Chairman Powell's "hawkish" remarks at last week's post-meeting press conference, stating that 50 basis points should not be assumed to be the new pace of the Fed's rate cuts, traders still expect a more aggressive pace of rate cuts, with the swap market expecting a further 75 basis points of rate cuts within the year.

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For the European Central Bank and the Bank of England, traders' expectations are more uncertain, with one to two rate cuts expected, and traders betting on a 25 basis point rate cut by the European Central Bank in October has increased from about 25% last week to around 50%.

The yield curve indicator has always been seen as a forward-looking indicator of economic recession.

With the US yield curve reversing, does this mean that the risk of recession has dissipated and the economy is expected to achieve a "soft landing"?

According to Deutsche Bank strategist Jim Reid, the current moment is precisely when risks are accumulating: "Economic recessions often begin when the yield curve recovers from an inverted state, and in fact, this has been the case in the past four economic recessions."

Some argue that the Fed's first rate cut of 50 basis points reflects the bank's concern for economic growth; the latest business activity data in the United States and the latest manufacturing data in the eurozone both show signs of economic deterioration.

However, some analysts hold a different view.

Bruce Kasman of J.P. Morgan and others pointed out that if the steepening of the yield curve is partly due to the rise in long-term bond yields, then this indicates that "the Fed is more confident in achieving sustained expansion."

James Reilly, an economist at Capital Economics, believes: "Although 'inversions' have often preceded economic recessions in the past... this change in yields reflects more of investors' concerns rather than a new signal of economic recession.

We doubt there will be a recession this time."