German yield spread tightest since 2017 as USA curve flattens

A trader works on the floor at the New York Stock Exchange in New York City US Dec. 4

A trader works on the floor at the New York Stock Exchange in New York City US Dec. 4

One of the most reliable warning signals for a recession just got a bit brighter.

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.

"If the bond market trusts the Fed's latest words about "data dependency" then the totally flat Treasury note curve is predicting softer future growth (and) will stay the Fed's hand", said Gundlach, who oversees more than $123 billion in assets.

Stuart Canning, research analyst at M&G Investments, has said the temporary yield curve inversion which saw three-year Treasury yields lower than two-year notes is a signal that interest rates in the United States may need to come down in the near-term.

The term premium refers to the higher interest rate investors typically demand to commit money for longer periods of time.

Usually it's the other way around, and it means investors are anxious about the short-term health of the economy.

The yield on the five-year Treasury dropped below the two-year and three-year Treasury yields on Monday.

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

According to the San Francisco Fed, each of the nine US recessions that have occurred since 1955 came between six months and 24 months after a an inversion in the yield curve of two-year and 10-year Treasury yields.

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No, at least not yet.

This has set off a debate among bond investors as to the meaning of the inversion, with one camp arguing it is mainly symbolic while others claiming it indicates a recession is near. High earners do the bulk of consumer spending, which is the life blood of the economy.

"In the initial phase of the inversion of the yield curve markets are anxious and react more aggressively to weak data than to strong data", said Masafumi Yamamoto, chief currency strategist at Mizuho Securities.

Bianco research noted today "There has not been one instance where the 2-year 5-year spread inverts and the 3-month 10-year spread didn't".

Global equities have been shaken by fears of a recession, fanned by the flattening U.S. Treasury yield curve - a phenomenon in which longer-dated debt yields fall faster than their shorter-dated counterparts.

The pound rose off 17-month lows of $1.2659 hit on Tuesday to around $1.2780, up 0.3 percent on the day, amid creeping optimism that Britain could opt to stay in the European Union after all.

Of course, that's still "pretty doggone tight", said Randy Frederick, vice president of trading and derivatives at Charles Schwab. 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. The Federal Reserve is widely expected to raise rates at its meeting on December 18-19.

Thus, whether or not the 3-month to 10-year spread inverts may very well depend on how many more hikes the Fed gets in.

Even if the more important parts of the yield curve flip to inversion, that doesn't mean a recession will happen the next day.

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