Former Fed chair plays down recession fears despite bond yields fall

A former US Federal Reserve chair has played down the prospect of America being hit by an imminent recession, after heavy falls in government bond yields rattled markets.

Equity markets slumped into the red on Friday, and on Monday in Asia, after US 10-year Treasury yields inverted for the first time since mid-2007. Inversion, which is when long-term yields fall below short-term yields – often because panicked investors are switching from risky equities to safe-haven assets – is seen as a predictor of recessions.

The latest rush for safety was caused by the Federal Reserve last week maintaining interest rates and signalling it would not raise them this year. That was a reversal of its previously more hawkish stance and taken as evidence the Fed is concerned about the outlook for the US economy.

Parag Thatte, analyst at Deutsche Bank, said the “more dovish-than-expected Fed” was a “big surprise”, adding: “US 10-year bond yields have fallen over 15bps since the Fed meeting and are over 30bps below early March levels.”

Morgan Stanley said: “An inverted curve has implications for stocks, particularly given the fact we are now full on valuation. In our view, lower rates are only good to a point because eventually the fall in rates is not just about the Fed giving equity investors a green light to risk up, but it’s also about slowing growth.”

However, on Monday Janet Yellen – who chaired the Fed between 2014 and 2018 – told the Credit Suisse Asian Investment Conference that she believed the yield curve may signal a need to cut interest rates, but not a recession, according to Reuters.

And in a note, Rabobank argued: “A negative 3-month/10-year spread is seen as a reliable harbinger of a looming recession.

“That said, to put Friday’s move into some perspective, an admittedly somewhat historical Bank for International Settlements report, published in 1996, put the odds of a recession in fourth quarters time at 50% once the spread has dipped to -82bps. At the close of Friday, this spread stood at -0.9bp which, according to the BiS analysis, would be consistent with a slightly over one-in four chance of a recession in 12-months’ time.

“Nevertheless, it is not so much the outright likelihood of a recession being priced that is of a concern, but rather the fact that the odds are being rapidly repriced despite the notably more conciliatory stances being adopted by policymakers on both sides of the Atlantic.”