U.S. recession not imminent despite yield curve inversion, BlackRock executive says

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FILE PHOTO: Traders work on the floor of the NYSE in New York

NEW YORK (Reuters) – A U.S. recession is not imminent despite the inversion of a part of the U.S. Treasury yield curve which has been “artificially pressured” by some investors, BlackRock Inc, the world’s largest asset manager, said in a note on Friday.

The closely watched gap between two-year and 10-year yields, whose inversion has preceded past recessions, turned negative last week, fueling a debate on whether the signal presages a downturn this time around.

“We do not see a recession occurring in the near-term,” said Gargi Chaudhuri, head of iShares Investment Strategy, Americas, at BlackRock.

“While we are hesitant to say that this time is different, we note that many factors now differ from previous yield curve inversions,” she wrote.

Longer-dated yields had been pushed artificially low by investors such as pension funds with improved funding status, contributing to the curve inversion, she said.

Inversions of key parts of the Treasury yield curve – which occur when yields on shorter-term Treasuries exceed those for longer-dated government bonds and signal economic worries – have concerned investors in recent weeks, as the Federal Reserve grows more aggressive in its fight to slow the economy and tackle inflation.

Analysts have said the central bank’s unprecedented bond purchases, as well as excess savings after the coronavirus crisis, are holding longer-dated yields lower than they would otherwise be.

The 2s/10s yield curve has been steepening this week, with the 10-year yield standing 18.8 basis points higher than the yield of two-year notes on Friday.

BlackRock’s Chaudhuri said more hawkish signals by the central bank – increasingly determined to tighten financial conditions through rate hikes and balance-sheet reduction to fight inflation – have contributed to the curve steepening.

“We still see room for longer end interest rates to move modestly higher from here”, she said.

(Reporting by Davide Barbuscia in New York; Editing by Ira Iosebashvili and Matthew Lewis)