Yield Curve Recession Signal Fades as Haven Sell-Off Deepens
Treasuries extended their sell-off to a third day, pushing the 10-year yield above the rate on three-month bills for the first time since July. The spread inverted in March for the first time in a decade, in what’s considered a harbinger of a U.S. recession in the coming 18 months.
The U.S. and China agreed on the outlines of a partial trade agreement on Friday, and the Trump administration said it will delay next week’s scheduled tariff increase. Signs of progress in Brexit talks compounded the risk-on tone, with the European Union recommending that detailed negotiations begin. With the clouds hanging over the global economy appearing to lift somewhat, traders trimmed bets on further easing by the Federal Reserve.
“A Brexit deal should lift growth prospects for Europe,” Seema Shah, chief strategist at Principal Global Investors, said via email. “U.S. recession risk has primarily been driven by weakness associated with the U.S.-China trade war, so good news in that arena should lower recession risk, and therefore need for Fed cuts.”
Benchmark 10-year yields rose as high as 1.77%, and ended Friday about 20 basis points higher on the week. Meanwhile, rates on three-month bills were about 1.66%. This portion of the yield curve, which inverted by as much as 56 basis points in August, reached positive 10 basis points Friday, the steepest since May.
The haven sell-off bled into other asset classes, with the yen and the Swiss franc leading Group-of-10 currency losses. Gold tumbled, while stocks surged.
Fed fund futures show that traders are pricing in about 29 basis points of additional easing by year-end, compared with 35 basis points earlier this week.
©2019 Bloomberg L.P.