What is it that I am hearing about an inverted yield curve in the US?

Even as treasuries have slumped and the treasury yields have touched a high of 2.47%, there is a new phenomenon emerging in the US. For the first time in nearly 16 years, the US markets are seeing the inversion of the yield curve. The inversion of the yield curve happens when the shorter term bond yields are higher than the longer term bond yields. This is an indication of an unwillingness to hold bonds for the long term, indicating likely recession.

The inverted yield curve is also an indication of the fact that the Fed rate hikes may happen much faster than expected. In March, the US Fed hiked Fed rates by 25 bps with promise of hike rates in each of the remaining 6 Fed meets in 2022. However, now the expectation is of a 50 bps rate hike in May FOMC meeting. US bond yields have already shot up sharply and at this rate, the RBI will have to shift its monetary stance from accommodative to neutral.