Key Slice of U.S. Yield Curve Becomes Most Inverted Since 2007
The gap between 3-month and 10-year rates dipped Tuesday to negative 9.2 basis points-- the most negative since March.
(Bloomberg) -- A key slice of the Treasuries yield curve became the most inverted since 2007, as growing angst over trade friction is overshadowing expectations that the Federal Reserve will cut interest rates by year-end.
The gap between three-month and 10-year rates dipped Wednesday to negative 12.3 basis points, breaking past a March level, when it first reached levels last seen in the global financial crisis. The spreads between most other sectors of the curve have narrowed as well. Historically, an inverted curve has been a signal that a recession is looming.
U.S. Treasuries continued to rally Wednesday with haven buying driving the 10-year yield to the lowest since September 2017 at 2.24% as stocks in Asia fell, tracking a late sell-off on Wall Street. Global bond yields have resumed their slide after comments from President Donald Trump further dimmed the prospects of a U.S.-China trade deal and renewed tensions in Europe also damped demand for riskier assets.
The flattening trade faces risks, including Friday’s release of the Fed’s preferred inflation gauge, which is forecast to hold below officials’ 2% target. Another low reading could spur traders to price in more rate cuts in 2019, potentially re-steepening the curve.
“People are fighting to find yield,” said Tom di Galoma, managing director of government trading and strategy at Seaport Global Holdings LLC. “And I don’t see the trade war going away. Given the inversion, we’re likely about a year and half away from a U.S. recession.”
Fed officials have said that persistently low inflation would warrant a rate cut. BMO Capital Markets strategists Ian Lyngen and Jon Hill say it’s unclear what it would take to meet that criteria, according to a note Tuesday. Yet for them it’s only a matter of time before more policy makers signal this “conditional cut stance,” which would enforce the view the curve will steepen again.
The gap between two- and 10-year yields, which hasn’t inverted in this cycle, narrowed to as little as 12.5 basis points -- also the least since March -- and down from about 25 basis points at the start of the month.
To contact the reporter on this story: Liz Capo McCormick in New York at emccormick7@bloomberg.net
To contact the editors responsible for this story: Benjamin Purvis at bpurvis@bloomberg.net, Mark Tannenbaum, Nicholas Reynolds
©2019 Bloomberg L.P.