Quote:
Originally Posted by opendoor
While that's true, I'd argue that the current bond/treasury yields are less market influenced than in the past. In the US at least, the Federal Reserve is deliberately keeping short-term yields high by borrowing trillions of dollars from money market funds and banks at ~5% interest. Effectively, they're paying investors in order to shrink the treasury market; the idea being that if that money flowed into treasuries, short-term yields would be forced downwards which would undermine the effects of their rate hikes.
So essentially, in the current situation the central banks are intentionally trying to invert the yield to achieve their policy goals, whereas yield inversions in the past were more driven by market sentiment. Presumably the latter would be far more predictive of a recession than the former.
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The Fed has always controlled short term rates using the discount window, that's how the target rates work.
Longer rates are definitely a market forecast of future rates, and right now the market still thinks central banks are going to have to start cutting fairly soon. I think some of that is a political forecast not an economic one - market participants believe in the Fed put (which had existed in every market issue since 2008). The market believes the Fed will push more for the economy than inflation if push comes to shove.
I think a big part of the reason short rates are so high is because of Central Bank independence though. Governments are running huge deficits (which are very stimulative/inflationary) while central banks are trying to pull back that stimulus using interest rates.
All that to say, it's hard to predict what will happen when fiscal policy and monetary policy are both pushing very hard, but in opposite directions.