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U.S. Treasury bond curve inverts for first time since 2007 in recession warning

Economic IndicatorsAug 14, 2019 03:30PM ET
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LONDON (Reuters) - The U.S. Treasury bond yield curve inverted on Wednesday for the first time since 2007, in a sign of investor concern that the world's biggest economy could be heading for recession.

The inversion -- a situation where shorter-dated borrowing costs are higher than longer ones -- saw U.S. 2-year note yields rise above the 10-year bond yield.

The curve inverted to as much as minus 1.7 basis points by 1045 GMT .

(GRAPHIC - US Treasury curve inverts: https://tmsnrt.rs/2YLaA5f)

Such an inversion, considered a classic recession signal, occurred last in June 2007 when the U.S. sub-prime mortgage crisis was gathering pace (US2YT=RR) (US10YT=RR). The U.S. curve has inverted before every recession in the past 50 years, offering a false signal just once in that time.

"Historically the U.S. curve was always thought of as a recession signal and it remains to see if that's still the case. The world certainly seems a less safe place," said Tim Graf, chief macro strategist at State Street (NYSE:STT) Global Advisors.

Weak economic data and inflation, global trade tensions and risks such as the consequences of Brexit have driven concern about world growth, fuelling market expectations of central bank rate cuts and sparking hefty falls in government bond yields.

The U.S. 30-year Treasury yield tumbled to a record low of 2.05% on Wednesday. In Germany, the 10-year bond yield fell to a record low of -0.64% after data showed the euro zone's powerhouse economy shrank in the second quarter.

"The yield curve inversion is a bad omen for the economy," said Arne Petimezas, an analyst at AFS in Amsterdam.

"Inversions in crucial segments of the yield curve have always heralded recessions. However, typically central banks ignore the warning signal. They often cut too little or too late."

Elsewhere, yield curves have been less accurate in predicting downturns but Germany's was at its flattest since 2008 (DE2YT=RR) (DE10YT=RR).

Britain's bond yield curve also inverted on Wednesday for the first time since the global financial crisis .

In March, the inversion of the U.S. yield curve hit 3-month T-bills for the first time in about 12 years when the yield on 10-year notes (US10YT=RR) dropped below those for 3-month securities.

That metric reverted back and then inverted again in May. Over that period, the 2-/10-year curve did not invert.

Some have cast doubt on how accurate the yield curve remains as a recession predictor after a decade of multi-trillion dollar central bank money-printing stimulus.

Graf said the backdrop now was not a "perfect apples to apples comparison" to the last curve inversion episode, which happened just over a year before the collapse of Lehman Brothers sent the world economy into a tailspin.

"The supply-demand dynamics for safe assets are different and to some degree it explains why the curve inversion may last longer without portending recession, than during past episodes."

U.S. Treasury bond curve inverts for first time since 2007 in recession warning
 

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Comments (16)
Gill Singh
Gill Singh Aug 15, 2019 4:31AM ET
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Every time the Republicans have come to power we head into recession, Bush Sr, recession, Bush Jr . recession, now here we are going to enjoy the ride once again and each time the rich got richer. Every time when followed by Democrats big recovery Clinton and again Obama, will we never learn or does US peoples love to be in pain ( hurt me , hurt me ) , how many times before we say enough.
Al Vlaj
alvlaj Aug 14, 2019 4:47PM ET
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Wait... so who is going to pay all of Trump’s socialist voter (farmers) subsidies when we all lose our jobs?? ...
Joshua Tafoya
Joshua Tafoya Aug 14, 2019 2:03PM ET
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The 10 year and 3 month yields have been inverted for months now. Since May. This is nothing new! It’s all media BS and no one knows why the market is crashing for sure. It’s the big boys and gals manipulating the markets and making money off the little guys.
Tom OKray
Tom OKray Aug 14, 2019 1:51PM ET
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Amazing yield curve inverts for 3 minutes and the market goes crazy nothing is normal in Trumps world.
Ariel Rosenthal
Ariel Rosenthal Aug 14, 2019 12:56PM ET
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it's interesting how the stock market been going up and down. maybe savings is better now. then investing.
John Manning
IceWater Aug 14, 2019 12:56PM ET
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my tactic is to a) identify the trend. and then b) if the trend is up I buy if the trend is down I will sell short e-mini S&P 500 futures contracts they are $50 a point I always use a trailing stop loss on the 10-day moving average line that way you lock in your profits and you are not at risk of losing a lot you can make serious money doing this and it is very safe
Erski Gumby
SB20 Aug 14, 2019 12:56PM ET
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John Manning What percent do you set your trailing stop?
Alex Fernandez
Alex Fernandez Aug 14, 2019 12:01PM ET
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should've dropped all my stocks early last week. could've should've blah blah blah
Thunderfury Pally
Thunderfury Pally Aug 14, 2019 11:16AM ET
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party is over baby! start buying gold to overcome the recession
Adamo Nals
Adamo Nals Aug 14, 2019 9:30AM ET
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It has nothing to do with the president he’s doing the right thing finally after 30 years against China who are thieves. The market needs to correct the 2600 to 2700. Then it’s a good buying opportunity
Leon Dame
Leon Dame Aug 14, 2019 9:30AM ET
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Aww sum ting wong paper tiger?
Ravjir Urjinee
Ravjir Urjinee Aug 14, 2019 9:30AM ET
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Corporations stole those profits not China!!! Hate it when people dont know whats happening! Fiat Currency always goes to zero!!! Money is the problem!
Ariel Rosenthal
Ariel Rosenthal Aug 14, 2019 9:30AM ET
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I do agree. but we need to sit and negotiate. or stocks will fall short.
nick bryson
nick bryson Aug 14, 2019 9:30AM ET
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China is stealing intellectual property from US companies.
Jan Buyle
Jan Buyle Aug 14, 2019 9:29AM ET
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That is because Trump made America great again...
Ronda Zelman
Ronda Zelman Aug 14, 2019 9:22AM ET
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"sound democratic fiscal governance"? Yeah, like the one in California...
Leon Dame
Leon Dame Aug 14, 2019 9:22AM ET
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And Baltimore and Detroit too! And remember Obama is why there has been all this economic success, but the yield curve situation is because of Trump.
Alfredo Collazo
Alfredo Collazo Aug 14, 2019 9:22AM ET
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oh please obama only started having less than horrible progress because congress became largely republican in his 2nd term. Even then we didnt see a spike in the market or good indicators until 2016. and the dips in this presidency came when we saw the dems take back some congressional power.
Erik Esparza
Erik Esparza Aug 14, 2019 9:02AM ET
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AHOD...
Tom OKray
Tom OKray Aug 14, 2019 8:53AM ET
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Welcome to the Trump effect, the last recession downturn happened during a republican administration after massive taxcuts as well only to have to be reversed by sound democratic fiscal governance, guess it will have to happen again.
Nicolas Luu
Nicolas Luu Aug 14, 2019 8:53AM ET
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So Obama, Clinton and Bush have nothing to do with this downturn? wow!!!
Antonio Velardo
Antonio Velardo Aug 14, 2019 8:53AM ET
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Much less all together.
Kyle Guy
Kyle Guy Aug 14, 2019 8:53AM ET
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Sound Democrat fiscal governance. (I'm assuming you meant Democrat and democratic which are different things)  That's hilarious!  Their policies have cost America trillions of debt and in Canada the Liberals have been a disaster to our fiscal policy.
druid returns
druid returns Aug 14, 2019 8:53AM ET
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these things happen on timescales longer than 3 years
Tom OKray
Tom OKray Aug 14, 2019 8:53AM ET
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Bush did as histury shows the majority of recessions and depressions occured from republican policies, you can't cut taxes and continue to wildly spent= recession time.
Ed Smith
Ed Smith Aug 14, 2019 8:49AM ET
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"For the first time since 2007"?? hasn't this been the case for a while now? search "yield curve inversion" news
Notvery Goodathis
Peteymcletey Aug 14, 2019 8:49AM ET
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Title could be better here. The 2 below the 10 is a new signal.
Notvery Goodathis
Peteymcletey Aug 14, 2019 8:49AM ET
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Notvery Goodathis 10 below the 2 rather.
Al Vlaj
alvlaj Aug 14, 2019 8:49AM ET
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Not with the bond market. 2s through bills, but not as far out the curve.
Adeyemi Salau
Adeyemi Salau Aug 14, 2019 8:24AM ET
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Markets will continue it's up and down again. All equities seems to be in red already in pre-market
Bill Chan
Bill Chan Aug 14, 2019 8:24AM ET
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It will down to the deep sea
Antonio Velardo
Antonio Velardo Aug 14, 2019 8:23AM ET
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Omelettes served.
Aaron Last Name
Aaron Last Name Aug 14, 2019 8:19AM ET
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plunge protection team on deck
Erik Esparza
Erik Esparza Aug 14, 2019 8:19AM ET
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In effect...
 
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