Warning signs are flashing in the yield curve, a reliable recession indicator that measures the gap between short-term and long-term rates. During normal times, longer maturing bonds pay out higher yields than their shorter duration peers. But these aren’t normal times.
The gap between the 3-month and 10-year yields is now the most inverted since 2007.
“And we all know what happened in 2008,” Thin, the Brown Brothers analyst, wrote in a note to clients.
The good news, according to Thin, is that the yield curve inversion was deeper and lasted longer before the Great Recession.
However, he also pointed out that the yield curve had been improving before President Donald Trump unleashed another round of tariffs on China last week.
“US recession risks have indeed risen,” Thin said.
Even Trump sounded alarm by the bond market fluctuations.
“Yield curve is at too wide a margin,” Trump tweeted shortly before US markets opened.
The US president urged the Fed to cut interest rates “bigger and faster, and stop their ridiculous quantitative tightening NOW,” referring to the central bank shrinking its balance sheet.
10-year yield drops under 1.6%, 30-year yield nears record low as collapse in rates accelerates
Investors again rushed for the safety of government bonds and dumped stocks on Wednesday, exacerbating the August exodus away from risk assets as traders around the world settled in for a U.S.-China trade war without an end in sight.
The flight to safety sent the yield on the 10-year Treasury note — used as a benchmark for mortgage rates and auto loans — falling to a low of 1.595%, the lowest since autumn 2016. The yield on the 30-year Treasury bond bottomed around 2.12%, near its all-time low reached in 2016. Yields pared some of their declines later in the session, but held steady near multiyear lows.
The 10-year Treasury rate is about 40 basis points below its level one month ago, down more than 35 basis points in August alone and representing a sizable move for the relative stable U.S. bond market. The yield ended July above 2%.
Bond yields move inversely to their prices; yields fall when investors demand Treasurys.
The head-turning moves in the bond market weren’t isolated to the United States, however, as rates in Germany and the United Kingdom clinched all-time lows across the board on Wednesday.
The yield on the German 10-year bund hit a new all-time low of -0.6% while the 30-year bund also hit a record at -0.137%. The 2-year German yield touched -0.849%.
an upward change in the 10-year Treasury bond’s yield from 2.2 percent to 2.6 percent is a sign of negative market conditions, because the bond’s interest rate moves up when the market trends down.
Conversely, a downward move in the bond’s interest rate from 2.6 percent down to 2.2 percent actually indicates positive market performance. You may ask why the relationship works this way, and there’s a simple answer: There is no free lunch in investing.
From the time bonds are issued until the date that they mature, they trade on the open market, where prices and yields continually change. As a result, yields converge to the point where investors are being paid approximately the same yield for the same level of risk.
This prevents investors from being able to purchase a 10-year U.S. Treasury note with a yield to maturity of 8 percent when another one yields only 3 percent. It works this way for the same reason that a store cannot get its customers to pay $5 for a gallon of milk when the store across the street charges only $3.
Bond markets around the world are sending distress signals.
A race to the bottom of foreign exchange values could lead to a deep recession or even a depression.
In the U.S., the yield on the 10-year Treasury has buckled below 1.7%, the lowest level since before President Trump was elected in 2016.
Declines in the stock market tend to garner most of the media’s attention, but the collapse in U.S. and global interest rates likely deserves much, much more.
Rates are crashing around the world, and this does not bode well for the global economy.
Late Monday, after China allowed its currency to slip in value against the U.S. dollar, the U.S. Treasury Department named China a “currency manipulator,” escalating an already bitter trade war between Washington and Beijing.
One cannot rule out further tit-for-tat retaliation between the two countries, nor can we rule out a worldwide series of competitive currency devaluations designed to give each country that devalues a competitive export advantage.
The problem here is that a race to the bottom of foreign exchange values is just the type of policy, coupled with trade protectionism, that helped turn a deep recession in the late 1920s into The Great Depression of the 1930s.
A steep slide in U.S. government-bond yields last week wrong-footed investors and left some pondering what was once unthinkable: whether interest rates in America could one day turn negative.
Historically, people who lent money out got more money back later, a way to compensate for inflation, for the risk of not being repaid and for forgoing other investments.
Now, though, there is more than $15 trillion in government debt around the world with negative yields. That means, essentially, that savers holding these bonds are paying the government to store their money.
So far, the U.S. has avoided that fate. Less than a year ago, the Federal Reserve was hiking short-term interest rates, and investors were betting that yields—which rise when bond prices fall—on longer-term debt would continue climbing as U.S. growth showed signs of accelerating and as unemployment plumbed historic lows.
The trade dispute between the U.S. and China, slowing global growth and financial-market turmoil late last year changed that. The Fed pivoted in the beginning of 2019 and, late last month, cut short-term rates for the first time since 2008.
Last week, the added fear of a currency war sent yields tumbling. That sparked new discussion about larger forces that have dragged yields below zero elsewhere and to which the U.S. may not be immune. Those include lackluster economic growth since the financial crisis and persistent soft inflation that has puzzled many economists.
The U.S. Dollar is the world’s largest reserve currency. It is used in most transactions involving trade in commodities, especially oil, and also for many international financial transactions and large deals. The U.S. Dollar’s preeminence in the world financial system provides it with stability due to broad global demand.
However a retreat from globalisation via China-U.S. trade wars, and an increasing hawkishness in foreign policy by the U.S., Russia and China could offset the Dollar’s dominance.
Russia is said to be trying to de-dollarise after President Vladimir Putin pledged to reduce the country’s dependence on the U.S. Dollar following the imposition of U.S. sanctions over its incursions into Ukraine and the use of prohibited nerve agent Novichok in the attempted assassination a UK-based former spy.
The Euro has been the unlikely winner in the war on the Dollar’s dominance and has come to replace the Dollar in all of Russia’s oil exports to China.
“The share of Euros in Russian exports increased for a fourth straight quarter at the expense of the U.S. currency, according to central bank data,” says Andrey Biryukov in an article on Bloomberg News. “The common currency has almost overtaken the Dollar in trade with the European Union and China, and trade in rubles with India has surged. The dollar’s share in import transactions remained unchanged at about a third.”
h/t Digital mix guy