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Weekly Insights From The FNArena News Desk 06/06/19

Part Two of last week’s Weekly Insights carried a chart by Morgan Stanley illustrating how, adjusted for QE and QT by the Federal Reserve, the US bond market had been in inverted yield curve mode since November last year.

For those who are less familiar with what this actually means: “inverted yield curve” refers to the rather unusual situation whereby US government bonds with an expiry date in ten years from today are offering a lower yield than shorter duration bond yields, like three months for example.

As everybody will understand, this instinctively doesn’t make much sense as longer dated loans (which is what a bond effectively is) should offer higher yield than a short term loan.

In financial parlance this then translates into the US bond market is predicting an economic recession lies ahead, which is why all the talk is about recession this month.

In practical terms it means the Federal Reserve tightened at least one time too much late last year. The bond market is now signalling to the Fed thou shalt need to be loosening monetary policy, and sooner rather than later.

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