US economy

Yield curve hits decade low in wake of Powell speech


A measure of the US yield curve that is seen by some as a predictor of a coming recession has dropped to a new decade low as investors reacted to the dovish undertones from Federal Reserve chair Jay Powell in his Jackson Hole speech.

The difference between two- and 10-year Treasury yields declined to below 20 basis points for the first time since August 2007 to 19.6 basis points. The measure has turned negative before every US recession of the last 50 years.

Mr Powell said he sees few risks of the US economy overheating, defending the central bank’s approach of gradually raising interest rates. He also acknowledged that “risk factors abroad and at home” could warrant a shift in the central bank’s policy stance over time — which some analysts and investors interpreted as a hint that problems in emerging markets could force the Fed to defer interest rate rises.

Two-year Treasury yields crept slightly higher on the expectations of more interest rate increases to come, while 10-year yields remained under pressure from tepid inflation expectations.

Banks are seen to benefit from a larger difference between short-dated and longer dated interest rates that allow them to profit from borrowing at lower short-term interest rates and lending at higher long-dated rates. The S&P 500 financial sector traded up 0.3 per cent on Friday morning in New York, trailing the broader index which moved 0.5 per cent higher.



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