August 14, 2019 / 1:40 PM / 2 months ago

TREASURIES-U.S. yield curve inverts for 1st time in 12 years in recession warning

    By Gertrude Chavez-Dreyfuss and Dhara Ranasinghe
    NEW YORK/LONDON, Aug 14 (Reuters) - The U.S. Treasury yield
curve inverted on Wednesday for the first time since June 2007,
in a sign of investor concern that the world's biggest economy
could be heading for recession. 
    The inversion - where shorter-dated borrowing costs are
higher than longer ones - saw U.S. 2-year note yields rise above
the 10-year yield.
    Weak economic data and low inflation around the world,
global trade conflicts and political tensions in places such as
Hong Kong and Argentina have sparked worries about world growth,
fueling market expectations of central bank interest rate cuts
and triggering steep falls in government bond yields.
    The U.S. curve inverted to as much as minus 2.1 basis points
, a metric widely viewed as a classic recession
signal. The last time this yield curve inverted was in June 2007
when the U.S. subprime mortgage crisis was gathering pace.
   The U.S. curve has inverted before every recession in the
past 50 years, offering a false signal just once in that time
    "A recession is certainly possible, especially with trade
tensions rising," said Ellis Phifer, market strategist at
Raymond James in Memphis, Tennessee. "It is an imperfect
indicator, but it normally follows. Recessions are inevitable in
my book."
    He added that the inversion puts additional pressure on the
Federal Reserve as it heads to its next monetary policy meeting
in September.
    With the inversion, U.S. benchmark 10-year yields fell to
1.574%, the lowest since September 2016, while 30-year yields
tumbled to a record low of 2.015%.
    "I don't think we have seen the bottom in yields yet as we
continue on this path of just absolute increased uncertainty,"
Phifer said. "I think potentially the bottom could be the
1.30%-1.35% in the 10-year."
    In morning trading, U.S. benchmark 10-year Treasury note
yields were last down at 1.604%, from 1.68% late on
    Yields on 30-year bonds slid to 2.051% from
2.137% on Tuesday.
    At the short end of the curve, U.S. 2-year yields fell to
1.599% from Tuesday's 1.669%.
    In March, the inversion of the U.S. yield curve hit 3-month
T-bills for the first time in about 12 years when the yield on
10-year notes dropped below those for 3-month
    That metric reverted back and then inverted again in May.
Over that period, the 2- to 10-year curve did not invert.
    Some have cast doubt on how accurate the yield curve remains
as a recession predictor after a decade of multitrillion-dollar
central bank money-printing stimulus.
    Tim Graf, chief macro strategist at State Street Global
Advisors said the backdrop now was not a "perfect
apples-to-apples comparison" to the last curve inversion
episode, which happened just over a year before the collapse of
Lehman Brothers sent the world economy into a tailspin.
    "The supply-demand dynamics for safe assets are different
and to some degree it explains why the curve inversion may last
longer without portending recession than during past episodes."
  August 14 Wednesday 9:21AM New York / 1321 GMT
                               Price        Current   Net
                                            Yield %   Change
 Three-month bills             1.9425       1.9846    -0.023
 Six-month bills               1.8825       1.9323    -0.031
 Two-year note                 100-76/256   1.5953    -0.074
 Three-year note               99-230/256   1.5348    -0.069
 Five-year note                101-44/256   1.5038    -0.064
 Seven-year note               102-36/256   1.5493    -0.069
 10-year note                  100-56/256   1.6012    -0.079
 30-year bond                  104-140/256  2.0464    -0.091
   DOLLAR SWAP SPREADS                                
                               Last (bps)   Net       
 U.S. 2-year dollar swap        -1.00         0.75    
 U.S. 3-year dollar swap        -4.00         0.25    
 U.S. 5-year dollar swap        -6.75        -0.25    
 U.S. 10-year dollar swap      -11.50        -1.00    
 U.S. 30-year dollar swap      -40.50        -1.25    
 (Reporting by Gertrude Chavez-Dreyfuss in New York, Dhara
Ranasinghe in London and the London Markets team; editing by
Jonathan Oatis)
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