US Yield Curve Warns of Economic Slowdown Ahead

The US yield curve is sending out a warning sign that consumers may struggle to handle rate hikes. The bond market has been experiencing a rout, with yields surging to multi-year highs due to sticky inflation and expectations of a Federal Reserve rate hike.

However, the more significant story may be the shape of the yield curve, which is flattening as investors bet on the Fed's need to tighten policy in response to elevated inflation numbers. This could lead to four quarter-percentage-point rate hikes within a year.

The narrowing gap between short- and longer-dated US borrowing costs suggests that bond investors are already looking beyond the rate hikes and bracing for an economic slowdown that may follow. The benchmark '2s/10s curve', which measures the difference between two- and 10-year yields, has shrunk to its tightest spread since July 29.

Meanwhile, rising oil prices are also putting pressure on consumers, with US crude oil back above $100 a barrel and diesel prices scaling $6 a gallon for the first time ever. The average 30-year mortgage rate is now back above 7%, which could have significant impacts on consumer spending.