The 3-month to 10-year US Treasury yield curve that started in November 2022 has been continuously inverted for 25 months, without pushing the economy into recession. The current federal government accounts for 38% of new non-financial sector borrowing, compared to only 19% -24% in previous periods of multiple reversals. The private sector has lower leverage, longer maturity of corporate debt, and reduced sensitivity to short-term interest rates. The proportion of non-financial corporate commercial paper and bank loans to bonds has decreased to 21%, compared to 69% and 70% in 1969 and 1973, respectively. The government continues to borrow and spend, and Steven Blitz, Chief US Economist at TS Lombard, believes that in a fiscal led environment, raising the federal funds rate requires a greater magnitude to lower overall demand. If the government continues to finance, short-term interest rate hikes will have limited economic constraints, and the tightening function will be more borne by the 10-year and 30-year US Treasury yields.
