This Market Indicator That Frequently Signals a Recession Just Flashed Red

US dollar falls on economic growth fears

US dollar falls on economic growth fears

The difference between short-dated and long-dated US Treasury yields narrowed further on Tuesday as the inversion of the yield curve spread between more maturities, prompted by worries about a slowdown in US economic growth. Here is what that means.

US two-year Treasury yields rose above three-year Treasury yields on Tuesday for the first time in more than a decade as traders piled on bets the Fed might be close to ending its rate-hike campaign.

They are considered the world's safest securities because they are backed by the full faith and credit of the US government.

A bond yield is the return an investor gets on a government or corporate bond.

Yields are determined by the bond's price relative to its stated interest rate. And that's why investors are paying attention to this latest hiccup in bond yields. When the economy is healthy and investors are forecasting good times ahead, they generally demand higher yields for Treasurys that mature a decade or more into the future than those maturing in a year or two.

Whether or not the 3-month to 10-year spread inverts may very well depend on how many more hikes the Fed gets in. For investors, though, it's a big deal for one simple reason: An inverted yield curve is often the dark cloud that precedes the storm. So a 30-year bond will deliver a much higher yield than a 2-year note.

"There has been a huge flight to safety in the European bond market ..."

German 10-year yields slipped to six-month lows of 0.247 percent before rising back to 0.259 percent.

On rare occasions, some or all of the yield curve ceases to be upward sloping.

The yield curve inverted between the two- and 10-year yield before the recessions of 1981, 1991, 2000, and 2008.

The rest of the curve still has an upward slope, although the curve overall has been flattening for some time.

Gundlach told Reuters the Treasury yield curve from two- to five-year maturities is suggesting "total bond market disbelief in the Federal Reserve's prior plans to raise rates through 2019". It offered a false signal just once in that time. That remark appeared to backtrack from a previous statement by Powell in which he said rates were still a "long way" from the targeted neutral rate.

Recent news has contributed to flattening the curve, including a speech on November 28 by Fed chair Jerome Powell interpreted by many as signaling a U.S. slowdown. 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.

Will the Fed risk triggering an economic recession especially during this period of political turmoil and uncertainty?

A yield curve inversion has no power to predict the length or severity of a downturn. 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.

Signals from the Federal Reserve last week that it may be nearing an end to its three-year rate hike cycle has pushed the 10-year US Treasury yield to three-month lows below 3 per cent.

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