Alarm bells are ringing louder in bond markets.
Among the superlatives: the yield on 30-year US Treasuries fell below 2 percent for the first time and the world’s pile of negative-yielding debt surpassed US$16 trillion. And looming over it all was the 10-year Treasury yield dipping below that of the two-year, in what is considered a harbinger of a US economic recession in the next 18 months.
That expectation, nurtured in recent weeks by worsening US-China trade relations and signs global growth is slowing, was bolstered by weak Chinese and German economic data.
The so-called yield inversion drew the ire of US President Donald Trump, who tweeted that US Federal Reserve Chairman Jerome Powell is “clueless.”
The 30-year Treasury yield yesterday fell as much as 6 basis points to 1.9623 percent in Asia trading, after sliding 15 basis points the day before.
Meanwhile, an inversion of the two to 10-year yield curve that briefly occurred during New York trading surfaced again. The 10-year Treasury yield was as much as 1.3 basis points below the two-year rate yesterday.
Bad European and Chinese data were the trigger for the global bond rally, Goldman Sachs Group Inc chief global rates strategist Praveen Korapaty said.
“From the pace of the move, I suspect some long-held steepeners are being unwound as well,” Korapaty said.
Another widely watched recession indicator, the yield difference between three-month and 10-year Treasuries, inverted in March and has been negative much of the time since, bedeviling investors who anticipated that the curve would steepen as the Fed began to cut interest rates.
The global rush for bonds on Wednesday also inverted the two-year to 10-year UK yield curve.
Trump placed the blame for the “crazy inverted yield curve” squarely on the US central bank, which he believes raised interest rates too quickly.
The Fed’s reluctance to ease policy more aggressively is “holding us back,” he tweeted.
Yield curves normally slope upward as investors demand compensation for putting money at risk over longer periods.
As fears grow of a weaker economy in the future, investors drive down yields on longer-dated assets on expectation that rates would drop.
There is another incentive to buy longer bonds, and that is due to the positive convexity value. This means that those with a longer duration will see larger price climbs in a rally than those with shorter maturities.
The US bond market has been a destination for haven flows given that there are fewer and fewer positive-yielding assets to park cash in globally, said Richard Kelly, head of global strategy at Toronto-Dominion Bank.
“The curve inversion to this point is flagging a 55-to-60 percent chance of a US recession over the next 12 months,” Kelly said. “We can all debate whether those signals are as accurate as they once were, but we still seem to be in a slow grind lower for sentiment and momentum and need some positive surprises to change those trends.”
The curve is not the only thing flashing high alert. The New York’s Fed index showing the probability of a recession over the next 12 months is close to its highest level since the global financial crisis, at about 31 percent.
Others are not yet ready to sound the alarm. The Reserve Bank of Australia’s (RBA) No. 2 official yesterday weighed in on the debate, questioning the value of using the inversion as a sign of recession.
“At the moment the US economy is actually growing above trend so they’ve got a fair way to slow from here,” RBA Deputy Governor Guy Debelle said.
Trade disputes are a key risk, though, he said.
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