On Monday, 2- and 5-year Treasury yields inverted, meaning the shorter dated 2-year money became more expensive than the later maturing 5-year.
In an "economic letter" published by the San Francisco office of the U.S. Federal Reserve (Fed), Michael D. Bauer and Thomas M. Mertens summarize the implications of an inversion succinctly: "Every U.S. recession in the past 60 years was preceded by a negative term spread, that is, an inverted yield curve". The yield on a short-term Treasury bond is now more valuable than the return on a longer-term bond. He's a finance professor at Duke, and the man who first demonstrated that the yield curve can act as a recession predictor.
The Australian dollar, viewed as a barometer of Chinese growth, gave up early gains to trade 0.26 percent lower. Most economists are forecasting the USA economy will continue to grow in 2019, though at a slower pace than this year.
Along with the renewed narrowing of the yield curve, economists on December 3 were parsing a conflicting set of new data.
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Far from the USA facing trouble, however, New York Fed President John Williams said on Tuesday the economy is strong and the base case outlook is for rate increases to continue through 2019. "We are following a strategy and taking account of data over time as it comes in and in response to significant changes in direction". -China trade tensions appeared to ease one risk Fed officials had seen on the horizon, the action in the bond markets raised another.
Even as the announcement of a "truce" in U.S.
The dollar trimmed some of its recent losses but remained under pressure on Wednesday, as an inversion in part of the Treasury yield curve raises concerns about a potential USA slowdown. "Keep it simple. Quantitative Tightening is bad for stocks".
But since then, it has persistently declined, especially since the middle of last week, and now is at its narrowest since July 2007, on the eve of a steep recession. It has spread to the eurozone, where the German 2-10 yield curve is at its flattest since mid-2017 at 85.70 basis points.
"A lot of it is momentum", said John Canavan, market strategist with Stone & McCarthy Research Associates in NY.
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While interest rate hikes have sent short-dated yields higher, tepid inflation and slowing economic growth expectations have kept longer-dated yields pinned down.
"It's a sloppy predictor because at some point after yield curve inversion you could get a recession that could be one year, two year, three years", said Nicholas Colas, co-founder at DataTrek Research in NY.
If that inversion happens, investors should prepare for a potential US recession as soon as mid-2019.
The Fed, as of September, expected to hit 3.1 percent by the end of 2019 and continue as high as 3.4 percent the following year.
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