Recession Check: What Is the Yield Curve Telling Investors Now?

Video Credit: The Street
Published on August 28, 2019 - Duration: 01:24s

Recession Check: What Is the Yield Curve Telling Investors Now?

It's all caused by the trade war.

Here's how the U.S. market has behaved of late and why.

The 10-year treasury yield fell to its lowest level against the 2-year treasury since 2007 on Tuesday.

Wednesday, the 10-year treasury was yielding 1.45%, with the 2-year treasury yielding 1.5%.

Sure, this is an inversion, but the inverted part of the yield curve investors should pay attention to is the spread between the 3-month treasury bill and 10-year bond.

The inversion of the 3-month and 10-year yields has deepened of late, and if the inversion remains for a long period of time, the chances of a recession soon theoretically increase.

The 3-month is yielding 1.99%, against the 10-year's 1.45%.

This signifies investors are piling into longer-dated safe assets, driving the price up.

Price and yield move inversely.

Investors are increasingly worried a recession is coming soon, thereby expecting low inflation and seeking safe assets instead of riskier ones like stocks and high yield bonds.

This is largely stemming from the trade war.

Although economic data globally began to decelerate in late 2018 independent of the what tariffs that existed then, the worsening tariff situation on both the U.S. and Chinese sides has moved the deceleration along faster.

Investors fear GDP is fast approaching 0%, which means the next rung below would be negative growth, or contraction.

So if investors are pricing in several interest rate cuts from the Federal Reserve in 2019, why have stocks fallen this week?

Remember, the S&P 500 is still up 14% year-to-date, as interest rate cuts would provide a support level to stocks.

But the index is down 2.34% in the past few days.

That's because Federal Reserve chairman Jerome Powell didn't indicate with certainty there will be two rate cuts this year.

Moreover, stocks have fallen of late because, even with two rate cuts supporting stocks, the spat between President Trump and Xi Jinping has gotten so intense that if the currently threatened tariffs are implemented, the U.S. economy would feel a lot of pain.

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