Treasury Yield Inversion Indicates Investors Concerned About Growth

Investors tracked by the CME Group’s FedWatch tool believe central bank policymakers are more likely than not to cut rates at least once by December 2019.
James Hyerczyk
Falling Treasury Yields

U.S. Treasury yields plunged across the board on Thursday as investors shunned risky assets on continued concerns over global economic growth and the escalating trade conflict between the United States and China.

In the U.S., the benchmark 10-year Treasury note fell to their lowest level since December 2017, as global equity markets lost ground. Additionally, the 30-year U.S. Treasury bond dropped to a 16-month low.

In another sign that global economic conditions are worsening, two yield curve indicators briefly inverted on Thursday. The gap in yield between U.S. 3-month and 10-year notes, as well as that between 2-year and 5-year notes fell, suggesting expectations of slower economic growth.

The price action suggests that Treasury investors have become more concerned with growth and the potential for the trade dispute to extend for a longer period of time than previously thought. Essentially, investors have been handed a huge dose of reality when just a month ago, they were gearing up for the end of the trade dispute.

The recent drop in yields has been orderly, which may mean the “panic” move is still coming. With a long week-end holiday coming up, investors may shift into risk-off mode on Friday because of the increasing air of uncertainty. Tensions are extremely high and long weekends can be filled with surprises.

To recap the latest events, another surge in Treasurys indicates that the raging trade spat between the two economic powerhouses could intensify and further undermine global growth. On Thursday, German Flash Manufacturing PMI came in lower than expected indicating the contraction is getting worse. Additionally, Flash Manufacturing PMI and Flash Services PMI also contracted further.

In the U.S., Flash Manufacturing fell to 50.6 and Flash Services PMI dropped to 50.9, both multi-month lows. New Home Sales also missed the forecast, coming in at 673K.

Finally, the futures markets have definitely diverged from the U.S. Federal Reserve. The central bank paused its cycle of rate hikes in March, citing downgraded economic forecasts and anemic inflation prints. That has kept short-term yields anchored near the Fed’s overnight lending rate. In the meantime, the futures markets have been indicating that rates should be lower.

Investors tracked by the CME Group’s FedWatch tool believe central bank policymakers are more likely than not to cut rates at least once by December 2019.

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