Stocks are falling sharply after the bond market threw up another warning flag on the economy. Because of that link, substantial and long-lasting inversions of the yield curve are largely viewed as a strong predictor that a downturn is on the way.
It's believed that wary investors effectively bid down the price of the longer-term bonds as they look for a safe place to put their money.
The bond market, however, sees a rate decrease at the USA central bank's September meeting as a sure thing, with the only question being the size. But when short-term interest rates rise above long term rates, it's called an "inverted yield curve", and it's happening now.
Now with the yield curve inversion, investors are disturbed as such a bond market move has signaled every U.S. recession in the past 50 years.
After its early dip, the yield on the 10-year Treasury stood at 1.58%, even with the yield on the two-year. As has the bid in the U.S. 30-year Treasury, which is now trading below 2% - a new record low, with the hunt for (quality) bonds, with any positive "real" yield rolling on like a juggernaut. For instance, three-month Treasurys have been yielding more than 10-year Treasurys since late May.
One of my favourite indicators on the Fed's implied path, largely because it tends to lead other parts of the bond curve.
The tumult in stocks was triggered by an overnight intraday fall in yields of 10-year U.S. Treasury notes US10YT=RR below the two-year yield US2YT=RR, the first such drop since 2007, in what is known as a yield curve inversion and widely seen as a sign of a looming recession. They were last 2.008%.
"Forecasting future economic developments is a tricky business, but the [yield curve] has a strikingly accurate record for forecasting recessions", they wrote.
The yield curve for the German government is not inverted.
The fact that people are willing to take such little money for their long-term bonds suggests they aren't too anxious about inflation. "Now too slow to cut.", Trump tweeted on late Wednesday. Inflation usually picks up when the economy is hot.
"While we don't expect an imminent recession, the case for further rate cuts in the United States is getting stronger", he said.
After dipping below 2 percent, the 30-year yield was hovering around 1.99 percent on Thursday morning, which is slightly below official interest rates. Former Fed chair Janet Yellen said Wednesday that the US economy has enough strength to avoid a recession, but noted that the odds have "clearly risen".
Money markets price a growing chance the Fed will cut rates by half a point at its September meeting. The labour market is strong, and most people who want a job are able to get one.
USA gold futures GCv1 settled up 0.2% at $1,531.20.
Furthermore, this "inversion" in bond markets has not occurred since 2007, just before the global financial crisis. It's acknowledged that recessions normally arrive within 18 to 24 months following the inverted yield curves.
If you have been reading through recent financial headlines, the yield curve inversion topic seems to be the top concern for global financial markets. Prices to us have not gone up, and in some cases, have come down.
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