Aug 28, 2019

Markets provide an unambiguous signal that investors expect recession

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Data: Federal Reserve Bank of St. Louis; Chart: Chris Canipe/Axios

There had been debate among economists and fund managers about the importance of previous yield curve inversions, but Tuesday’s market action provided an unambiguous signal that investors are expecting a recession.

Driving the news: The U.S. Treasury yield curve completely inverted Tuesday, with 1-, 2- and 3-month Treasury bills all paying higher interest rates than 30-year Treasury bonds.

  • The yield on the 3-month bill moved as much as 52 basis points above the 10-year note (the highest since 2007) with the 10-year yield ending the trading day well below the 2-year — fully inverting another closely watched yield curve.

Why it matters: The 3-month/10-year and 2-year/10-year yield curve inversions are closely watched precedents of recession. Economists at the Federal Reserve recently called the 3-month/10-year inversion "the best summary measure" for an economic downturn.

The big picture: Despite President Trump's rosy assessment of the U.S.-China trade war, investors are growing more concerned that there is no end in sight and are buying up safe-haven U.S. government debt to take cover.

  • "Those looking for a recession in the next 12 months are nervous that any downturn in business optimism associated with the trade war will eventually trickle down to hiring and undermine consumer confidence," Ian Lyngen, head of U.S. rates strategy at BMO Capital Markets, wrote in a note to clients.

What's happening: Investors continue packing into the long end of the yield curve, bidding up prices and pushing down yields.

  • “As the curve inverts further, it has inspired more long-end buying,” Mike Lorizio, head of Treasuries trading at Manulife Asset Management, told Reuters.
  • Yields on the benchmark 10-year note fell to the lowest since 2016 and are now less than 20 basis points away from their lowest level in history, while the 30-year bond fell below 2%.

It was also the first time since 2009 that the S&P 500′s dividend offered a higher yield than 30-year Treasury bonds.

  • The only other time stock dividends on the U.S. benchmark index paid more than a 30-year government bond in the last 40 years was in March 2009, according to data from Bespoke Investment Group, CNBC reported.

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