The yield curve that has been inverted since July 2022 has set a record for the longest period in history. However, the long-short interest rate spread has significantly converged in the past two months. Can the yield curve that is about to correct itself drive optimism in the crypto market?

Source: Finance M Square What is an inverted yield curve?

Yield Curve Inversion means that the yield on short-term bonds is higher than the yield on long-term bonds. Under normal circumstances, long-term bonds should have higher yields than short-term bonds because investors require higher returns to compensate for the uncertainty and risk of long-term investing. An inversion in yields is often seen as a warning sign of an economic recession.

Will an inverted yield curve cause a recession?

An inverted yield curve is generally detrimental to economic activity and financial markets because higher short-term yields raise borrowing costs for consumer and business loans, while lower compensation for longer-term loans discourages risk-taking behavior.

The following table is a comparison table of yield curves and economic recessions over the years. It can be seen that before the dot-com bubble in 2000 and the financial tsunami in 2008, there were inversions in yield rates, which subsequently triggered a global stock market crash and economic crisis. decline.

Is the inversion different this time?

However, the yield curve has been inverted since July 2022, setting a record for the longest period in history. The inversion between the two-year and ten-year Treasury bonds is usually considered a signal of an upcoming recession, but the market has continued to discuss it. The United States is about to have a "hard landing", a "soft landing" or even a "no landing", and there has never been an economic recession.

Deutsche Bank believes this is partly due to increased consumer savings as the economy emerges from the Covid-19 pandemic, which provides a buffer against rising borrowing costs. In addition, by providing emergency liquidity measures, the Fed successfully contained the banking turmoil caused by the changing shape of the yield curve last year.

Cutting interest rates will help return the yield curve to normal

Now the Federal Reserve has the opportunity to start cutting interest rates in September. Once it starts cutting interest rates, short-term bonds will be more sensitive to a reduction in the federal funds rate. Short-term interest rates may fall more and faster than long-term interest rates, thus inverting the yield curve. Righted.

The "Goldilocks" version for Rob Haworth, senior director of investment strategy at U.S. Bancorp Wealth Management, is a combination of falling inflation and economic growth. In this case, the Fed would be more confident in its ability to lower interest rates without risking a sharp rise in inflation.

A less ideal scenario is that there are risks to the economy, and the Federal Reserve will be forced to significantly reduce short-term interest rates to offset the threat of economic recession. For example, if unemployment suddenly rises significantly, this situation could weaken consumers' spending power and trigger a recession.

Whether there will be a recession depends on how quickly the Fed cuts interest rates

According to CME Group FedWatch data, investors expect a 73% chance of a one-point interest rate cut in September. There is no panic like in early August when the chance of a two-point interest rate cut was as high as 69%. This also shows that if the Fed is Slowly lowering interest rates while inflation is slowing down will allow the financial lending market to get back on track, which should help the economy grow and get rid of the shadow of recession caused by the inverted yield curve. .

End of inversion good for cryptocurrency rally?

The end of an inversion in yield rates usually means that the economic outlook has improved, market confidence has returned, and investors may re-enter risky assets, driving the stock market up. Cutting interest rates reduces corporate financing costs and helps companies expand investment and operations.

Deutsche Bank also pointed out in the report that capitalism works best when loans and investments outside the curve take more risks and earn positive returns.

In addition to benefiting the stock market, the end of this wave of inversion of the yield curve will also lead to a new wave of bull market for cryptocurrencies, which have gradually entered the traditional financial field this year.

This article The yield curve inversion is coming to an end! Can it bring impetus to the rise of cryptocurrency? First appeared in Chain News ABMedia.