In the past two months, the US 10-year bond yield has moved up from 4.09% to 4.97%, while the policy interest rates have remained stable. Is the disconnect between the two indicating the stress ahead?
If historical patterns are looked at then the US 10-year minus 2-year yield turns slightly negative before an official recession begins. During these times the policy rates are above 2%. Though the same is being unfolded currently as the deducted yield is at -0.14% and policy rates at 5%, whether an actual recession begins in the next few months is not confirmed as of now.
In addition to this, the rise in yields is also accelerating due to continuing fundraising by the Treasury Department while the Foreign holders sell part of their holdings to defend currency valuation.
This will have a higher impact in coming months as the inflation trend becomes clear and if it starts to rise firmly then the Fed might be forced to raise rates higher than estimated.
Thus, the level of uncertainty for the next two or three quarters remains high and any shocks to the financial or real world might trigger an official recession.