Are We Heading Towards a Recession?

01 April, 2019, 00:13 | Author: Darnell Patrick
  • US 10-year treasury yields were last 1.9 basis points below three-month rates compared to 0.07 bps

Benchmark 10-year Treasury yields fell to their lowest levels since December 2017 on Monday while the yield curve between three-month bills and 10-year notes inverted further as investors evaluated last week's dovish pivot by the Federal Reserve.

Overnight, MSCI's broadest index of Asia-Pacific shares rebounded 0.2% after losing 1.4% in the previous session, though there were some eye-catching moves within that.

On Wednesday, Wall Street's main indexes were lower in morning trading.

For example, the iShares Short Treasury Bond ETF (SHV), which holds Treasuries with maturities of less than one year, has a 30-day SEC yield of 2.34% compared with an equivalent yield of 2.42% for the iShares 7-10 Year Treasury Bond ETF (IEF). The S&P 500 fell almost 2 per cent on Friday.

That said, Yellen conceded that the us economy is indeed slowing down, and that if the inversion of the yield curve meant anything, it would be a signal for the Fed to cut interest rates, rather than to continue hiking them. Since World War II, every recession has been preceded by an inverted yield curve. Ten-year notes gained 18/32 in price to yield 2.393 percent, down from 2.455 percent on Friday.

But according to Janet Yellen, the former chair of the Federal Reserve from 2014 to past year, the inverted yield curve this time is not as apocalyptic as it looks like. "This is not a healthy sign, as bond-market watchers should know and equity-market obsessives should rapidly learn".

"I'd be careful not to over-read or overreact in any moment to what markets are saying...because they have the ability to change on a dime", Kaplan said.


The Treasury Department will sell $US113 billion in coupon-bearing supply this week, including $US40 billion in two-year notes on Tuesday, $US41 billion in five-year notes on Wednesday and $US32 billion in seven-year notes on Thursday.

Investors will also be watching Fed policymakers scheduled to speak today. Unprecedented central bank stimulus may have also altered the curve dynamics, making an inversion a less clear signal of economic weakness than in the past.

Fed funds rate futures are now fully factoring in a rate cut later this year, with about an 80% chance of a move priced in by September.

The euro zone bank stocks index was up 2.4 percent after Reuters reported the ECB was studying options to lower the charge banks pay on some of their excess cash as a possible way to offset the side-effects of its ultra-easy policy. These products won't decline almost as much if interest rates reverse course and they still offer relatively attractive yields.

The British pound stood at $1.3211, erasing small gains made after lawmakers voted to wrest control of the Brexit process from Prime Minister Theresa May's government for a day.

To sum up, Capital Economics isn't expecting recession, but it is expecting slower USA and global growth.

United States crude futures traded at $US59.55 per barrel, up three-quarters of a per cent on the day but below Thursday's $US60.39, which was its highest level since mid-November.

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