US flattening of yield curve – Is a recession imminent?

Spread between 2 and 10 year US Treasury yields has narrowed to 55-60 basis points

Historically a negative yield curve, where 2 year rates exceed 10 year ones, leads to an economic recession  within six months

However this time things are quite different.

Demand for US treasury bonds is very strong in a world where global rates remain very low

Chinese Government continues to invest in mid to long treasury bond maturities and this has led to yields on longer term maturities coming down

US Federal Reserve has begun increasing short term rates exacerbating the flattening of the yield curve

Current flattening of the yield curve is more a result of the current supply / demand picture for US Treasuries and not a predictor of an impending recession as has been the case historically

Investment Grade US Corporate Bond Spreads remain historically low, indicating a strong economy with no signs of a recession

Inflationary expectations remain historically low as a result of many factors including technological improvements in all industries leading to automation, deflationary pressures from Amazon and food price deflation

Should US Corporate Tax Reform be approved by both houses, this will provide a long term economic stimulus.  It is too early to tell at this moment if tax reform will lead to a pickup in inflation.

Conclusion

The probability of an impending US recession remains low at this time

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