Yield curve inversion spreads worry across global markets
Lower yields on 10-year US government bonds than two-year notes may presage recession and further pain for equities, credit bonds and currencies.
It may have been a short-lived and modest intra-day move, but the fact that the 10-year US treasury bond yield briefly fell below the yield on the two-year US treasury note on Wednesday – coming amid a broad equity market sell-off and continued uncertainty over trade tensions between the US and China – has the markets more nervous of another crash.
Jim Reid, Deutsche
Jim Reid, research strategist at Deutsche Bank, is on holiday but spent most of his day in communication with colleagues in the office, before sharing his worries with clients.
“Although other measures of the US yield curve have progressively inverted over the last few quarters, for me yesterday’s 2s/10s inversion is the one that worries me most,” he told them.
“In my opinion, it has the best track record for predicting an upcoming recession over more cycles than any of the others. Indeed, every inversion since 1956 has seen a recession follow. Although the median length of time to a recession is 17 months, credit spreads have pretty much exclusively widened from the point of inversion onwards.”
Mark Haefele, global chief investment officer at UBS wealth management, is far from panicking yet.