In a classic sign of investor concern that the world’s biggest economy could be heading for recession, the U.S. Treasury bond yield curve inverted on Wednesday for the first time since 2007.
The inversion — a situation where shorter-dated borrowing costs are higher than longer ones — saw U.S. 2-year note yields rise above the 10-year bond yield… Such an inversion, considered a classic recession signal, occurred last in June 2007 when the U.S. sub-prime mortgage crisis was gathering pace… The U.S. curve has inverted before every recession in the past 50 years, offering a false signal just once in that time.
Weak economic data and inflation, global trade tensions and risks such as the consequences of Brexit have driven concern about world growth, fueling market expectations of central bank rate cuts and sparking hefty falls in government bond yields. The U.S. 30-year Treasury yield tumbled to a record low of 2.05% on Wednesday. In Germany, the 10-year bond yield fell to a record low of -0.64% after data showed the euro zone’s powerhouse economy shrank in the second quarter… Britain’s bond yield curve also inverted on Wednesday for the first time since the global financial crisis.
Some have cast doubt on how accurate the yield curve remains as a recession predictor after a decade of multi-trillion dollar central bank money-printing stimulus… Tim Graf, chief macro strategist at State Street Global Advisors… said the backdrop now was not a “perfect apples to apples comparison” to the last curve inversion episode… “The supply-demand dynamics for safe assets are different and to some degree it explains why the curve inversion may last longer without portending recession, than during past episodes.”
MacDailyNews Take: Strange days in the bond market right now. Has the Fed kept the short-term rate too high? According to Al Lewis via CNBC, it certainly sounds like it:
Does this mean we’re having a recession and a big downturn in the stock market? Not necessarily.
First off, it may depend on how long the inversion lasts. A brief inversion could be just an anomaly. In fact, some inversions have not preceded recessions.
The curve may also have inverted because of the Federal Reserve. The market may be saying the Fed has kept the benchmark short-term rate it controls too high and that the central bank should cut rates further because the economy is slowing.
Also, some market observers have said that this time around the yield curve has been distorted by more than $15 trillion worth of foreign bonds that pay negative interest rates – negative interest rates being another trend that seems to make zero economic sense.
Since the 2008 financial crisis, central banks around the globe have never been able to return interest rates to historically normal levels. They lowered interest rates to zero, and even below in some cases, to fight the Great Recession. Interest rates and bond yields have been low all through the recovery and expansion that followed, and they’re low still. So no reason to panic, some market observers say, because this is the new normal.
And, if there is a looming recession, it may still be a ways off. A Credit Suisse analysis shows recessions follow inverted yield curves by an average of about 22 months and that stocks continue to do well for another 18 months.