‘Crazy inverted yield curve’: Trump launches blistering attack on Fed chief Powell
- Author: Darren Santiago Aug 19, 2019,
Aug 19, 2019, 1:43
Safe-haven government bond yields plunged this week, and the closely watched US yield curve between 2-year and 10-year notes inverted for the first time since 2007 on Wednesday, sending stock markets sharply lower.
The yield on the closely watched 10-year Treasury fell so low Wednesday that, for the first time since 2007, it briefly crossed a threshold that has correctly predicted many past recessions.
Last month, the Fed lowered interest rates - to the 2% to 2.25% range - for the first time since the 2008 financial crisis.
Economic stress in Argentina, fears of Chinese military intervention in Hong Kong and trade tensions worldwide are all pressuring the economic outlook, analysts note. The last inversion of this part of the yield curve began in December 2005, two years before the Great Recession tore through the global economy.
The temporary flip in yields sent stocks sliding, and the S&P 500 was down as much as 2.7% in the afternoon. Japan's Nikkei shed 1.2% as a yen surge hit the export-heavy market .N225. -China trade war - where the world's hopes of a resolution can rise and fall with a single tweet or statement - may cause businesses and shoppers to wait things out and rein in their spending.
The yield on 30-year US government debt fell to a record low below 2% and benchmark 10-year Treasury notes dropped to a three-year trough, beaten down by the U.S.
Markets in South Korea and India were closed for a holiday. Losses deepened even more after a top Australian central banker warned that the US-China trade war is damaging global growth and risks a "self-fulfilling downturn".
Neil Wilson, Chief Market Analyst for Markets.com commented: "The 3mo10yr curve has been inverted for some time already but the fact that 2s10s has also gone this way is a massive red warning light for the United States economy". Investors, anxious about the state of the economy, rushed to long-term safe haven assets, pushing the yield on the benchmark 30-year Treasury bond to a new record low on Wednesday.
MSCI's world equity index was down 0.2%, attempting to steady after the previous day's 2% rout.
Should you care about the yield curve inversion?
The yield curve is a graph of yields compared to bond maturity times, and normally yields go up as you move to longer maturities. Volatility has returned to the markets in August amid rising tensions in the trade dispute between the USA and China.
"It could be different this time", Carlson said.
Germany's economy contracted in the second quarter, while China's industrial output grew at its slowest pace in 17 years. At the same time, the debt markets did not bounce back with the stocks on the news of the tariff delay.
The Dow Jones Industrial Average .DJI rose 99.97 points, or 0.39%, to 25,579.39.
"Usually what generates that is people think there's a recession coming up, so they go for safer longer-term assets like the 10-year Treasury", said Tyler Schipper, an assistant professor of economics at the University of St. Thomas. Lower bond yields are bad for banks because they force interest rates on mortgages and other loans lower, which results in lower profits for banks.
Uncertainty about the U.S.
The dollar recovered from early weakness but a gauge of global equity performance edged lower on Thursday as concerns about global growth offset investor optimism over a surge in US retail sales last month and strong Walmart earnings.
The yield curve inversion also suggests that investors expect the Federal Reserve to keep cutting short-term interest rates in an effort to boost the economy, Rehling says. The Japanese yen strengthened 0.1% versus the greenback at 105.83 per dollar, having firmed 0.8% on Wednesday.
Worldwide benchmark Brent crude LCOc1 fell $1.50 to $57.98 a barrel. The euro weakened to $1.1137 from $1.1174.