The yield on the benchmark 10-year Treasury note threatened to break below that of the 2-year U.S. note on Tuesday as investors rushed toward safe haven assets amid global growth concerns.
The traditionally watched 2-year and 10-year Treasury curve is just 2 basis points away from inversion, a phenomenon heralded by many as a recession indicator. Investors are now demanding higher interest rates on short-term debt than they are longer term debt, a phenomena known as an “inverted yield curve.”
The yield on the benchmark 10-year Treasury note rose to 1.685%, just above that on the 2-year security at 1.665% and bringing the spread between the two yields to just 2 basis points. It narrowed to a fraction of 1 basis point earlier in the session. A basis point is one hundredth of one percent.
Investors often give the spread between the 10-year and the 2-year special attention because inversions of that part of the curve have preceded every recession over the past 50 years, albeit it often took months even years before an economic downturn hit.
Yield curve inversions “predicted 7 out of 9 recessions during the post-war period. This is a track record any economist would be proud of,” wrote Sung Won Sohn, professor of economics at Loyola Marymount University and president of SS Economics. “If the inversion started today, the economy could be in a recession within a year.”
A recession on average follows 22 months after inversion of the 2-10 yield spread, according to Credit Suisse analysis, but one has occurred in as little as 14 months after the signal, the firm found.
The yield on the 30-year Treasury bond traded slightly above its all-time low at 2.15%. Yields fall as bond prices rise.
Long-term yields have plummeted in August as concerns surrounding trade developments and GDP growth — coupled with expectations for lackluster inflation and more aggressive central bank action — have sent nervous traders in search of safer investments.
The yield on the 10-year Treasury note, an important rate banks use when setting mortgage rates and other lending, has fallen a steep 35 basis points this month.
“The US equity market is on borrowed time after the yield curve inverts. However, after an initial post-inversion dip, the S&P 500 can rally meaningfully prior to a bigger US recession related drawdown,” wrote Bank of America technical strategist Stephen Suttmeier.
The popularity of the safety offered by bonds is at financial crisis levels among professional investors as many steel themselves for slowing growth ahead, according to a survey of fund managers conducted by Bank of America Merrill Lynch.
The poll found a net 43% of market pros see lower short-term rates over the next 12 months, compared with just a net 9% that saw higher long-term rates. In sum, that’s the most bullish outlook on fixed income since November 2008.
“While yield curve inversions can be a leading indicator of economic weakness or recession, they are an early warning sign,” Suttmeier added. “Going back to 1956 it has taken between eight (1959) and 24 months (1967) for a US recession to start after a yield curve inversion.”
A firm inflation rating failed to cause the yield curve to steepen.
The government said its consumer price index increased 0.3% last month, buoyed by gains in the cost of energy products and a range of other goods. Excluding the volatile food and energy components, the so-called core CPI gained 0.3% after rising by the same margin in June.
Investors tend to buy Treasurys in response to weak inflation data because prices erode the purchasing power of bonds’ fixed payments.
The Treasury yield curve stemmed its flattening on Tuesday after the United States Trade Representative office said that certain items will be temporarily removed from Washington’s list of goods from China set for taxation. Products like cell phones, laptops, video game consoles and some toys will be exempt from the tariffs based on “on health, safety, national security and other factors.”
Market participants are also keeping an eye on pro-democracy activism in Asia after protesters forced Hong Kong’s main airport to cancel all flights on Monday. The protests first started in June to rally against an extradition bill to mainland China and have since become a larger political movement.
Meanwhile, a possible return to interventionist policies in Buenos Aires roiled the Argentine market in the previous session. It came after President Mauricio Macri, the business friendly center-right incumbent, lost by a far bigger margin than expected in presidential primaries.
— CNBC’s Jeff Cox contributed reporting.