"Investors are coming around to our downbeat view of the prospects for the USA economy", analysts at Capital Economics wrote on Tuesday, arguing that there was no reason to regard this pending yield curve inversion as different from others. No surprise, then, that one investor calls an inverted yield curve a "harbinger of doom". "It's the what-if scenario".
According to the San Francisco Fed, each of the nine US recessions that have occurred since 1955 came between six months and 24 months after a an inversion in the yield curve of two-year and 10-year Treasury yields.
So far, there has been no inversion of the two-year and 10-year. The Great Recession began in December 2007. That particular inversion has preceded every recession since the late 1970s.
Despite the usual signal coming from two-year and 10-year Treasury yields, Canning said the inversion on Tuesday has investors anxious. The good news is they're far leading indicators, meaning a recession is likely not imminent.
Shorter-dated securities are highly sensitive to interest rate policy set by a central bank such as the U.S. Federal Reserve.
"Today's move feels like the market is a scorned lover". But they have slashed those by more than half in the last few weeks, and that may have contributed to the out-sized rally in 5-year note prices in particular.
Yields are determined by the bond's price relative to its stated interest rate.
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"A lot of the rally in Treasuries has to do with the sell-off in stocks", said John Canavan, market strategist at Stone & McCarthy Research Associates in NY. "I do think it's overdone with short-covering and unwinding of money-losing positions".
While some regional bank presidents have been explicit in arguing the Fed should hold off raising rates to avoid an inversion, the consensus has been consistent: stay the course.
Oil prices pared some gains as fears flared that demand would stall due to a trade war between the US and China, and that Russian Federation remained a stumbling block to a deal to cut global crude supply. They also serve as a proxy for interest rates.
President Donald Trump has been railing against the Fed's ongoing policy of gradually raising interest rates, complaining that it's slowing USA economic growth.
Some traders said the dramatic curve flattening may be overdone and may revert if the government's November payrolls report out on Friday were to show solid jobs and wage growth.
That boosts the cost of borrowing for American households, and in turn pushes short-term Treasury bill rates higher, while putting downward pressure on long-term rates.
The flattening of the curve gained momentum after last week's signal by the Federal Reserve that it may be nearing an end to its three-year rate-increase cycle.
The dollar stumbled last week after Federal Reserve Chairman Jerome Powell on Wednesday said USA rates were nearing neutral levels, which markets interpreted as signaling a slowdown in rate hikes.