August 9, 2019
A key indicator for a looming recession—the spread between the three-month and 10-year Treasury yield—hasn’t quite reached DefCon 4 yet. But it’s on the highest alert the market has seen since 2007.
Rates on 10-year notes sank to 1.74% on Monday, nearly erasing the surge that followed President Donald Trump’s 2016 election. On Tuesday, they ticked down another basis point and then continued to fall as the week progressed.
As trading ended on Tuesday, 10-year notes yielded 32 bps less than the three-month bills at 2.05%, representing the most severe yield-curve inversion since just before the 2008 recession. The yield curve has been inverted for the past 11 weeks.
The movement in the bond markets comes amid increasing tensions between Washington and Beijing, with the Treasury Department characterizing China as a currency manipulator.
“In recent days, China has taken concrete steps to devalue its currency, while maintaining substantial foreign exchange reserves despite active use of such tools in the past,” the Treasury Department said Monday. “The context of these actions and the implausibility of China’s market stability rationale confirm that the purpose of China’s currency devaluation is to gain unfair competitive advantage in international trade.”
However, the U.S.-China trade war is merely fanning the flames of a global growth slowdown, Tom Essaye, the founder of Sevens Report Research, told Fox Business. Overnight, central banks in New Zealand, India and Thailand cut interest rates more than investors were expecting, he pointed out.
“Normally, we don’t care,” Essaye said. “They don’t move American markets. But in this global market, their bigger-than-expected rate cuts just adds to the growing concerns that we are running headfirst into a global recession. That’s what all this volatility is about.” He pointed out that the spread between the two-year and 10-year note yields, another closely watched gap, is also narrowing.
Asked how investors should feel, Essaye replied, “Worried. I don’t think panicked. But I certainly think that people should be looking at their financial state and making sure that they are ready for a potential winter.”
Even if the Fed cuts the federal funds rate again in September, it’s likely too late to turn around an economy that’s already begun to slow, Essaye said. “If the Fed cuts 25 basis points in September,” he said, “It’s going to be because they’re getting really scared about an economic downturn.”
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