Explainer: Significance Of Yield Curve Inversion

In the US, Treasury yields rose due to the recession worries and along with the concerns that the Federal Reserve will continue its steep interest rate hikes despite nascent signs of a slowdown in inflation. Several Fed policymakers have spoken of the need for continued rate hikes despite the lower-than-expected outcome of last week’s Consumer Price Index.

The yield curve between 2-year and 10-year Treasury notes remained inverted at minus 38.60 basis points on Tuesday. This is viewed as an indicator of an impending recession. The dollar index DXY meanwhile hit a peak of 106.94 in early European trading, recovering from the losses that were made on the back of lower-than-expected US inflation data. The index was last seen flat at 106.46.

Fed officials have no choice but to sound tough in the face of a very, very tight labour market and far too high inflation. It also seems hard to build a compelling case to sell the dollar in that context.