All of this indicates a slowdown in growth…maybe
figure 1: The 10-year fixed-maturity yield of the national debt minus the 3-month yield, %. Source: Ministry of Finance calculated by FRED and the author.
Maybe we won’t get that kind of hot economy, after all, the full-employed GDP will soar.
From Reuters:
Ludovic Colin, senior portfolio manager at Vontobel Asset Management, said: “The stock market is expected to explode in growth and profits in the next two to three years, and it is now clear that we will not have this situation.
Colin said, however, the bond market seems to be too pessimistic about starting to price a recession.
“We don’t think there will be a recession, but there will only be long-term growth that will not be as good as investors expected from January to March.”
Given that the spread is still positive, it seems unnecessary to predict another recession, especially considering the special factors that affect the term premium (for example, hedging, Fed quantitative easing, etc.), as discussed before the last recession (for example, Here with Here).
Declining inflation expectations (or at least break-even calculations) and real interest rates also indicate a cooling (relative to previous expectations).
figure 2: The five-year inflation breakeven is calculated as the five-year Treasury bond yield minus the five-year TIPS yield (blue), the five-year breakeven point (red) adjusted for the inflation risk premium and the liquidity premium per DKW (red), and TIPS The five-year rate of return (blue-green), all in %. Source: FRB follows D’amico, Kim and Wei (DKW) through FRED, Ministry of Finance, KWW, and the author’s calculations.
