Treasury yields continue slide with traders wary of 'curve inversion'


The two-year, 10-year yield curve is a key focus for investors as an inversion is seen as predictor of a United States recession.

The bad news for investors is that inverted yield curves have preceded each of the past nine US recessions.

Bob Michele, who heads global fixed income for JP Morgan's investment arm, said he doesn't expect the US yield curve to invert, but he was watching it closely. The longest-duration Treasury bond (meaning fixed-interest debt backed by the US government) is 30 years.

Given the current functioning of the world economy, "arguments are made that a flatter yield curve has less of a signal embedded in it" about coming economic performance.

On Tuesday the yield curve signaled caution and, along with worries about global trade and interest rates, it helped send the stock market to one of its worst days of the year. For its part, the central banks says that pushing up rates is necessary to keep the economy from overheating. Powell in remarks last week reiterated his upbeat outlook of an economy growing above potential, with the unemployment rate the lowest in almost 50 years, and in no need of emergency level interest rates. In its view, those rate hikes are putting the brakes on borrowing and hiring, keeping inflation under control. This may, in turn, lead to lay-offs and a slowdown in employment and growth and ultimately force the Fed to cut rates to spur the economy.

When did the yield curve invert?

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Data on Monday showed euro zone manufacturing expanded at its weakest rate in over two years in November, more evidence that the bloc's economic growth is past its peak.

No - and that's why this latest flip in yields may not augur recession.

A precarious situation for the Fed undoubtedly and one that I believe they will be forced to respond to with either an outright suspension of rate hikes for the next six months - potentially skipping the expected rate hike this meeting as well - or with a rate hike accompanied by very strongly worded assertions that the Fed will not raise rates again for an extended period of time and that rate hikes may themselves be in store in the very near future. But that hasn't happened yet, noted Charlie Ripley, senior investment strategist for Allianz Investment Management.

So should I brace for a recession?

As if a verse out of the book of Genesis, yield curve inversions generally predict financial plagues of Biblical proportions.

He added the need for the Federal Reserve to tighten monetary policy as fast as it is signalling had been reduced in recent times due to reduced activity in the U.S. housing and vehicle markets, highlighting that consumers are feeling the pinch of higher rates.

The gap between two-year and 10-year German bond yields tightened to 86 basis points, after the spread between two-year and 10-year U.S. Treasury yields narrowed overnight. Asked about the possibility of an inversion at a June press conference, Powell said "what we really care about is what's the appropriate stance of policy".