Treasury Yields Take Breather From Week-long Slide — BOND REPORT

Treasury Yields Take Breather From Week-long Slide — BOND REPORT

Treasury Yields Take Breather From Week-long Slide — BOND REPORT

WASHINGTON-U.S. stocks dropped sharply on August 14, as the bond markets signaled concerns about a possible recession with the yield curve inverting for the first time in 12 years.

The yield curve refers to the range of yields, or effective interest rates, on government bonds issued by the U.S. Treasury.

It is seen as a sign that investors want the assured returns from holding a longer-term bond and are anxious about the shorter-term outlook for the economy. That's because longer term bonds require people to lock their money up for a greater period of time - and investors want to be compensated for that risk.

Other parts of the yield curve have been inverted for a few months.

The yield on the 10-year Treasury briefly dropped below the two-year yield Wednesday, an ominous signal that has predicted past recessions.

Yields on two-year Treasury notes rose above the 10-year yield for the first time since 2007, a metric widely viewed as a classic recession signal, spooking investors.

Investors are on edge because the German economy shrank in the second quarter, and the US-China trade war still looms large over markets despite the latest truce.

"At the moment the USA economy is actually growing above trend so they've got a fair way to slow from here", said RBA Deputy Governor Guy Debelle.

While elevated trade tensions with China, and generalized global uncertainty has been a factor for investors for some time now, JJ Kinahan, TD Ameritrade chief strategist, said clients of his firm have been selling stocks and buying bonds more hawkishly for the past two months. The S&P 500 has rallied 22% on average between the first time a yield curve inverts and the start of a recession, Lynch noted.

Is the inverted yield curve reliable?

The S&P Europe 350 Index was down more than 1.5%, while London's FTSE 100 was also trending down, as was France's CAC and Germany's DAX.

Former Federal Reserve Chairwoman Janet Yellen has sought to assure the public that the indicator doesn't necessarily mean a recession. Clearly, the economy is not on the rise as President Donald Trump has stated.

"The whole world is jittery right now", he said, noting that the escalation of U.S.

All of this serves to explain why the bond market is heating up.

The curve was last at 0.70 basis point after the inversion reversed.

Expectations the U.S. Federal Reserve and other central banks would respond robustly to the recession warning helped world stocks to steady earlier.

Tom Essaye, founder of The Sevens Report, said on Wednesday: "Historically speaking the inversion of that benchmark yield curve measure means that we now must expect a recession anywhere from six-to-18 months from today which will drastically, and negatively, shift our medium-to-longer term outlook on the broader markets".

The 3-month US Treasury already inverted versus the 10-year this spring.

Experts say to to remain alert but aware that recessions don't always follow inverted yield curves.

In a note they said: "The lagged effects of the Fed's quantitative easing programme has made the curve flatter than it otherwise would be (relative to previous cycles)".

All of Wall Street's major indices suffered steep declines at the opening bell.

Money markets price a growing chance the Fed will cut rates by half a point at its September meeting.

"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".

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