Dollar pressured by falling U.S. yields; recession fears

Kenny Grant
December 7, 2018

World stocks tumbled to one-week lows on Wednesday, as declines by long-dated USA bond yields and a renewal of trade concerns stoked fears of a downturn in the world's biggest economy, the United States.

He added the need for the Federal Reserve to tighten monetary policy as fast as it is signalling had been reduced in recent times due to reduced activity in the U.S. housing and vehicle markets, highlighting that consumers are feeling the pinch of higher rates.

LONDON, Dec 4 (Reuters) - The gap between Germany's two-year and 10-year bond yields tightened to its narrowest in 17 months on Tuesday, after parts of the U.S. Treasury yield curve inverted overnight as optimism over the U.S.

Asian stocks slid on Wednesday, dragged down by Wall Street's tumble as sharp declines in long-term U.S. Treasury yields and resurgent trade concerns stoked investor worries about global economic growth.

If you've heard lately that the "yield curve" is inverting, your response might range from curiosity about what that portends for the USA economy to, perhaps more likely, the kind of drowsiness brought on by arcane financial jargon. An inversion of the two-year and 10-year yields has preceded each USA recession in the past 50 years.

The 3-month to 10-year spread is now 0.492 percentage points.

But it's worth asking why the yield curve is such an uncanny predictor of recessions (and no, it's probably not different this time).

No, at least not yet.

But the Fed's next rate hikes could be a game changer. They kind of promised and the markets would get scared if they flipped.

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Cornerstone Macro analyst Roberto Perli attributed the drop in 10-year yields to "two main culprits..."

The US Treasury yield curve inversion has been a classic indicator of an oncoming recession in history such as in the build-up to the Global Financial Crisis in 2007 and in advance of the recessions in 1990 and 2001. The Dow Jones Industrial Average closed down almost 800 points, or 3.10 percent, and the Standard & Poor's 500 fell over 90 points, or 3.24 percent. Of course, that's still "pretty doggone tight", said Randy Frederick, vice president of trading and derivatives at Charles Schwab.

Brent crude oil settled at $62.08 per barrel, or jumped up 0.63 percent.

The Cleveland Fed, meanwhile, has focused on the difference in yields between three-month Treasurys and 10-year Treasurys. That particular inversion has preceded every recession since the late 1970s.

A precarious situation for the Fed undoubtedly and one that I believe they will be forced to respond to with either an outright suspension of rate hikes for the next six months - potentially skipping the expected rate hike this meeting as well - or with a rate hike accompanied by very strongly worded assertions that the Fed will not raise rates again for an extended period of time and that rate hikes may themselves be in store in the very near future.

In fact, one section of the yield curve has already inverted: between 3-year and 5-year notes.

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.

"I do continue to expect that further gradual increases in interest rates will best foster a sustained economic expansion", Williams said at the New York Fed.

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