Fed survey points to tighter borrowing terms if yield curve inverts

WASHINGTON (Reuters) - A small majority of financial market players told the U.S. Federal Reserve in August that borrowing conditions could tighten if interest rates on short-term debt rose above rates for long-term debt, the U.S. central bank said on Thursday.

Fed policymakers in recent weeks have said they were looking out for the possibility that the yield curve for U.S. Treasury securities could invert, a development that in the past has sometimes preceded a recession.

The yield curve steepened this week, however, as yields jumped for long-term bonds after economic data bolstered the case for the Fed to raise U.S. interest rates again in December and beyond.

The Fed surveyed senior credit officers at 23 institutions between Aug 21 and Aug 31, asking them how they would react if the yield curve inverted moderately by the end of this year.

"Small net fractions of respondents indicated that price and non-price terms would tighten somewhat under the scenario," the Fed said in a summary of the survey released on Thursday.

Some survey respondents said they expected the tightening would happen because an inverted yield curve is associated with a "worsening" in market liquidity and weaker financial strength of counterparties, the Fed said.

The survey also found that nearly one-third of respondents indicated a decrease in funding demand for equities over the past three months.

(Reporting by Jason Lange; editing by Diane Craft)