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Inflation will shape the yield curve

As we await the U.S. inflation report for the month of March today, where most economists are expecting a 3.4% YoY increase in CPI, which will be the third month in a row of increasing prices. At the same time, it is important to remember that the U.S. treasury yield curve continues to be inverted (2Yr-10Yr shown below) and it has been like this, continuously, since July 2022, where inflation peaked at 9.1%. The fact that the yield curve has been inverted for almost 2 years is a sign that the economy is still trying to find equilibrium. If in fact inflation picks up and departs further from the goal of 2%, it’s not clear how the shape of the curve may change: perhaps long term yields should rise, with the bond market signaling we might not have rate cuts from the Fed, signaling a strong economy that can manage 5.25% official rates. But the long end of the curve could also fall more in anticipation of a recession caused by higher for longer rates. Risky assets should reprice depending on these scenarios.


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