The interest rate on 3-month US government bonds rose above their 10-year equivalent on Thursday, a very rare phenomenon that has been systematically followed by a recession for more than half a century.
This inversion, the name used by economists and investors, had not occurred since February 2020, when the markets were dislocated by the arrival of the Covid-19 pandemic.
Long-term interest rates are generally higher than short-term yields, because investing for a longer term involves greater risk, whether in terms of the evolution of the economy, the markets or even the outlook for the future. repayment of the loan.
A worrying sign
A reversal like the one that occurred on Thursday is closely followed by the markets, especially since the work of the Canadian economist Campbell Harvey raised, in 1986, the hypothesis that it was a harbinger of a recession.
The last eight recessions that the United States has experienced have all been preceded by an inversion of the yield curve. This curve is established by connecting, on a graph, all the rates of the shortest chances (a few months) to the longest (30 years).
With the inversion, instead of going up, the curve goes down, a sign that short rates are higher than long rates.
The theory is that with this reversal, the market is signaling that it is less confident in long term economic growth than in the short term. He thus envisages a medium-term recession, which would force the American Central Bank (Fed) to lower its rates.
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Last March, the yield curve had already shown the first signs of inversion. Since the beginning of July, the 2-year rate has been constantly moving above the 10-year rate, which was already considered by some to be the first sign of a recession.
This is a worrying signal, according to Christopher Vecchio of DailyFX, for whom the inversion between the 3-month and 10-year rates is perhaps more important than that with the 2-year rate.
On Wednesday, the 3-month rate rose to its highest level in 15 years, 4.04%. It emerged 4% Thursday, while the rate 10 was displayed 3.91%.