The Economy

Treasury Yields ‘Invert’ in Possible Recession Sign

"Yield curves are responding to what they see, to what I believe is a global economic slowdown," a portfolio manager says.
Matthew HellerMarch 22, 2019
Treasury Yields ‘Invert’ in Possible Recession Sign

Long-term Treasury bond yields fell below short-term yields on Friday for the first time since 2007, indicating growing pessimism over the outlook for U.S. economic growth.

Around 10 a.m., the three-month note yielded 2.468% while the benchmark 10-year was around 2.44%. A yield curve inversion has predicted the past seven recessions including the Great Recession that began in December 2007.

The spread between the three-month and 10-year Treasuries had recently dipped below 10 basis points for the first time since September 2007.

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The yield move came as the Federal Reserve has lowered its expectations for GDP growth to a 2.1% gain in 2019 and 1.9% in 2020. Some economists see it as a dark omen for an economy coming off its best year since the recovery began in mid-2009.

“Yield curves are responding to what they see, to what I believe is a global economic slowdown,” said Peter Boockvar, chief investment officer at Bleakley Advisory Group, told CNBC.

As Barron’s reports, short-term bond yields reflect current economic strength, while “the long-term end of the yield curve — 10-year Treasuries and further out — is thought to indicate bond investors’ long-term views of the market.”

“Yields on long-term bonds are usually higher during economic expansions because bond investors need more compensation to be locked in,” the publication noted. “But when the sentiment gets too bearish, the long-term yields can fall below the short-term yields.”

Economists also watch the spread between the two-year Treasury yield and the 10-year Treasury yield, which remains positive. But the three-month to 10-year spread is the Fed’s preferred benchmark.

“Bond market investors are showing they think growth could be a good deal beneath even [the] tepid levels” now being forecast by the Fed, CNBC said.

But economists also caution that while fixed income yields are falling, the stock market is rising. “Could it be that the yield curve is signaling weak global economic growth and low inflation without necessarily implying a recession in the U.S.?” asked Ed Yardeni of Yardeni Research.

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