U.S. Treasury bond curve inverts for first time since 2007 in recession warning

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.

Reuters:

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:

Al Lewis for CNBC:

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.

7 Comments

  1. It’s not the Fed, it is the poorly thought out trade wars that are causing this. Combine that with a failed tax cut and no policies to spur economic growth world wide and one has a recipe for disaster.

  2. “Has the Fed kept the short-term rate too high? It certainly sounds like it.”

    More Trumpism on a site supposedly dedicated to Apple. Cut the politickin’ and get back to your core MDN, or you’ll lose half your audience. Resorting to Trumpism when analyzing and reporting on Apple only gives a small, skewed view of what’s really going on.

    If the Fed had the only tool (interest rates) that controlled the world economy, it would be a no-brainer how to manipulate it, if growth was your goal. But the world economy is vastly more complex and interrelated than a simple Fed rate change can drive. Apple, the country, and the world would be far better off if the Fed were dismantled.

  3. Strange, I thought the yield inversion had happened a while back, or was that a different maturity treasury that had inverted? I recall the market tanked in the morning and bounced back by afternoon.

  4. In 2018, following the massive tax giveaway to corporations, trumpists rejoiced and claimed that the same organizations that spent the last 4 decades offshoring production to Chyyyna would take this cash windfall and suddenly reverse their strategy. They claimed the US GDP would boom to 4, 6, or 8% depending on which rally you attended.

    Corporations including Apple took the money and bought back their own stock, temporarily pushing Wall Street indexes to short term sugar highs. Executive bonuses surged. Apple shut down its Trashcan production line in Texas and is relocating it to Chyyyna.

    The administration then ripped up trade relationships that served America well for centuries, insulting everyone and everything including Mercedes Cars, French wine, Canadian timber, …. and has accomplished precisely zero in repeated (and isolated) trade talks with Chyyyna. Former trade allies sit on the sidelines.

    In Mississippi, chicken processing plants were raided, proving once again that law-evading US employers are the ones driving low skilled labor immigration. Executives have not been charged. Taxpayers instead are being told the “invasion” is compromised of drug dealers and murderers, and instead of corporate factory regulations and inspections, only a medieval wall can halt the cheap labor inflows.

    The Fed was expected to raise rates multiple times in 2019 based on the administration’s ebullient economic wet dreams. GDP growth continued but was not a step change from the last 8 years. In 2014, trumpists whined that 4% growth was horrible but later 2-3% in 2017-2018 was amazing. In 2019, GDP has started to slow as trade is in chaos. The administration has politically pressured the Fed to cut the prime rate, which belies the administration economic narrative. If the economy was strong, rates would need to rise.

    Then more shocking data showed up. Government spending is sharply up, revenue down. The deficit is WORSE than the former administration. Trickle down didn’t work, again. America’s “full employment” is borne on the backs of people working multiple low-wage, zero benefit service jobs to make ends meet. Consumer and public debt rising fast. Fixed income households are not benefiting, as their domestic investments generate no cash flow. Housing starts have slowed. US factory openings are not increased, and over a decade of increased production of natural gas and oil has accelerated closures of coal mines. As Chyyyna halts its oil imports, the international price has dropped 40%. Same for soybeans and wheat. The current administration attempted to appease their political base with welfare— not unlike auto bailouts a decade before, excepting that automakers actually had to pay their loans back, and they did.

    Now the administration blinks so Christmas shopping of Chinese junk & consumer stuff like Apple electronics will temporarily avoid consumer tariffs. Which shows that the administration’s strategy isn’t long term, it’s calculated as a short term political ploy. Triggering the media to report on one sh!tpile after another is all that is happening. It certainly isn’t delivering the manufacturing resurgence that was promised. Everyone in business is stockpiling so they can outlast this reckless incompetent administration.

    All through the unnecessary drama, the lies from the white house keep coming. The revolving door of incompetent cabinet swamp creatures keeps spinning, and the military is uneasily camped at the gates of Iran and North Korea, for unknown strategic reasons.

    Enjoy the ride, trumpists. You got conned.

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