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July 17, 2022: Global Yield Curves

World central banks are collectively in a process of tightening monetary policies. This action is designed to tamp out soaring inflationary pressures. However, this process if pushed too far, has the potential of driving global economies into a recession.

The closely-watched 2 and 10-year bond yields in seven countries have now inverted.  The Czech Republic, Chile, Poland, Iceland, United States, Sweden, and Canada have all posted higher short-term rates than their benchmark 10-year rates.

An inverted yield curve is often considered a predictor of an economic recession.

Nine countries have partially inverted or have a flat curve.  They are Singapore, Romania, New Zealand, South Korea, Norway, Russia, the United Kingdom, Qatar, Norway, and Hong Kong.

These 16 countries make up only part of the 70 countries whose bond yields are routinely monitored.  The majority of the world's countries still have a normal yield curve angle. 

Bottom line: Having the world's largest economy with an inverted 2 and 10-year yield curve is a concern.  Historically, a recession is foretold when short-term rates (3 and 6 months) are holding above 10-year rates. The duration of the inversion is also important.  Should this inversion continue for several months, then the percentage probability of the recession increases dramatically.