A new note from Swiss Re posits that the US has already started to slip into a recession.
In its Economic insights: The ‘Great Bond Massacre’ 2.0, the firm says that the world’s largest economy is either in recession or is about to enter one, referring to data from the Atlanta Fed GDP tracker.
The authors of the note– Jérôme Haegeli, group chief economist; Thomas Holzheu, chief economist for the Americas; and Charlotte Mueller, chief economist for Europe, all of whom work for Swiss Re—wrote of the current situation: “In June the US Federal Reserve delivered the largest rate hike since 1994, a year of a major sell-off in bond markets – like today.”
They added: “While the 1994 Fed hiking cycle of 1994 managed to engineer a “soft landing” for the US economy, this time is different, and we forecast a recession for the US in the next 12-18 months, with it possibly in a technical recession already. The swift regime switch to a steep hiking cycle and quantitative tightening after more than a decade of aggressive unconventional monetary policy puts financial markets in uncharted territory.”
Looking ahead to what will happen with sovereign bonds, Swiss Re said it expected yields to finish this year slightly higher than current levels as ‘ultra-loose’ monetary policy continues to unwind, despite fears of recession.
They added: “Even a recession may not be enough to bring yields down materially on a sustained basis if it is either mild and/or not accompanied by disinflation. Risks are for new upside inflation surprises that could push yields higher still. For this reason, we raise our 10y Treasury yield forecast to 3.2% for end-2022 and 3.5% for end-2023.”
Talk of a potential recession harkens back to a recent Reinsurance News story when Berenberg published a note saying that insurers were well placed for one.
Back then, the bank predicted what it called a ‘shallow recession’ in Europe, the UK, and US. The reasons it gave included the strength of cash positions and cash flows, solvency ratios nearing historical highs, combined ratios in the 93-95% range, and the extensive rewording of contracts in commercial lines insurance to exclude cyber and pandemic risk and to limit business interruption.
Swiss Re made other comments about potential recently, releasing a report at the end of last month that the world economy regained macroeconomic resilience in 2021, but warning that new challenges could ‘throw the recovery off course’ through 2022 and into 2023. Those comments themselves followed the firm estimating that, in 2020, the non-life profitability gap was roughly 7–11% of premiums earned, due to the low-yield environment.
