The Money Saving Expert Martin Lewis explained a long-term prediction of the spread in the US could potentially lead to a recession. The difference between two and 10-year Treasury yields seems well on the way to turning negative for the first time since 2019 as well, narrowing below 6 bps on Tuesday. This is the so-called curve inversion that is considered a reliable predictor of recession, although the US Federal Reserve has urged investors to also watch other curve segments which are still steep, giving it room to tighten policy further and faster.
Speaking on ITV’s Good Morning Britain, Mr Lewis said: “The markets are looking at, the markets are currently 0.75 percent by the end of this year they’re looking at about 1.5 percent for UK-based rates, maybe up to 2 percent.
“After that, it’s very difficult.
“There’s a thing going on in America at the moment called 10/2 which means the US bond rates for two years, interest rates are more expensive than for 10 years.
“There’s this long-term prediction of low-interest rates and in the short-term interest rates are likely to go up but cut back down again and that actually is a prediction that potentially there might be a worldwide recession again.
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“It’s now the best news that, I’m afraid but interest rates in the short-term are likely to go up to about 1.5 percent this year but nobody really knows.”
World share markets and global borrowing costs surged on Tuesday, as the first face-to-face talks between warring Russia and Ukraine in nearly three weeks yielded signs of progress.
Europe’s main bourses enjoyed 1%-2.5% gains and oil tumbled 4% as Russia’s deputy defence minister emerged saying Moscow has decided to drastically cut military activity around Ukraine’s capital Kyiv and also Chernihiv.
Wall Street looked set to extend a three-day run of gains. Asia had been lifted overnight too after the Bank of Japan defended its vast stimulus programme, although there was still the yen’s worst month since 2016 raising eyebrows.
Dealers also shrugged off bigger-than-expected drops in French and German consumer confidence data and signs that Russia will push ahead with plans to start billing for it gas in roubles, and is prepared to risk a historic sovereign debt default.
Germany’s benchmark 10-year Bund yield – the main gauge of European borrowing costs – hit its highest since early 2018 and 2-year yields turned positive for the first time since 2014, adding to the seismic shifts in global rates markets this year as inflation has surged.
Ten-year US Treasuries were at 2.47 percent while the equivalent 2-year yields were at 2.38 percent, having now risen an eye-watering 165 basis points this quarter.
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More than 200 basis points of US interest rate rises are also now priced in for 2022 which, if realised, would be the most in a calendar year since 1994.
“We have seen something that is a little unprecedented because the Fed is suddenly facing a question about its credibility and whether it can effectively reduce inflation,” Amundi’s Head of Multi-Asset strategies, Francesco Sandrini, said.
He added Amundi had revised down its European growth forecast to 1.5 percent for the year from 2 percent previously, but it could be lower if the situation continues to deteriorate.
“We question a lot our forecasts,” Sandrini said, especially as Europe’s big companies are more heavily exposed to commodity price pressures than US counterparts.
“It is extremely complicated, we need to proceed cautiously.”
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