Past experience has shown that this period of breathing relief may be very short, before long, there will be a longer and more serious hangover.
The trigger for a reversal of the curve may come later this week, if the minutes of the 30-31 July meeting to be released by the Federal Reserve on Wednesday, or Chairman Powell's speech at the Jackson Hall Economic Conference on Friday, suggest that U.S. policymakers are not wholly supportive of unreserved interest rate cuts. The model may push the short rate up and flatten the yield curve.
The first upside-down of the two-year and 10-year Treasury yield curves since 2007 last week has upset investors, who see it as a sign that the U.S. economy is heading for recession.
Although the two-year/10-year yield curve is temporarily out of inversion, the three previous waves of inversion show a pattern: steepening - then returning to a more sustained or larger inversion, which occurs many times, and then the recession strikes.
Three-month Treasury bills and 10-year Treasury yields are upside-down -- analysts and some Fed economists believe this is a more reliable indicator of recession. The curve has been hanging upside down in March, steepening in April and then again since May.
After the yield curve hangs upside down, some people suspect that the recession will follow, and the stock market panics. The yield curve reversed on Monday and the stock market rebounded.
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