This year’s growing inversion of the Treasury curve can be reconciled with the accompanying slump in credit spreads if the monetary tightening that has caused short-term yields to rise further above longer-term ones is not going to be followed by a significant slowdown in activity. Nonetheless, we aren’t convinced by this “soft-landing”, or arguably “no-landing”, narrative. Even if the economy has become less sensitive to changes in short-term rates, the fact remains that since early 2022 we have seen the fastest and biggest rise in fed funds in four decades. And it’s widely acknowledged that changes in short-term rates affect activity with a considerably long lag.
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