Following the recent Fed meeting, the US yield curve has flattened further, bringing an inverted yield curve closer – a development that has often served as a warning sign of recession in the past. In this report, we examine whether this is the case again and set out our specific forecasts for US and European short- and long-term yields for the coming months to quarters.

Real interest rates are rising alongside nominal rates. In the past, this was often a sign of stronger growth, as higher real interest rates were driven by companies borrowing more to invest. Now, however, other factors are also at play, and a further rise in real interest rates could set in motion a negative spiral that could have a significant impact on both short-term and long-term interest rates.

The rise in long-term interest rates over the past period has been driven not only by higher energy prices but also by concerns over public finances and increased demand for capital. In a scenario where the Strait of Hormuz reopens soon (which is by no means certain), we therefore do not expect long-term interest rates to fall to the lows seen just before the Iran War.