One of the most reliable warning signals for a recession just got a bit brighter. When short-term rates rise above long-term rates and "invert" the yield curve, it has been a reliable predictor of recession, though sometimes several months later, as confidence in the economic future erodes.
The greenback, which started the week on a weak footing as the apparent thaw in trade tensions between the US and China cooled demand for the safe-haven currency, extended its fall as investors anxious about the inversion of the short end of the USA yield curve in bond markets.
However, analysts said as traders grew anxious about sagging USA growth, longer-dated Treasury bond yields have been sharply weighed down.
Typically, bonds with longer maturities offer higher yields, as investors demand greater compensation to keep their money locked away for longer time periods. The yield curve has flattened as continuing interest rate hikes send short-dated yields higher, while longer-dated Treasuries are supported by tepid inflation and slowing global growth.
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On Monday, the difference between the two-year and 10-year Treasury yields dropped to just 0.15 percent, its lowest level since prior to the last US recession. The Australian dollar was down 0.5 per cent at $0.7307.
What exactly is a yield curve, and why is it inverting?
No, at least not yet. This is seen as a portent of a US recession.
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 USA housing and vehicle markets, highlighting that consumers are feeling the pinch of higher rates.More news: GOP tries to hamstring incoming Democratic attorneys general
Market watchers also say they won't get anxious until a more important part of the yield curve flips.
German 10-year yields are also being pushed down by domestic concerns, Commerzbank's Rieger said, with European growth indicators sagging and Italian political concerns rumbling on in the background.
The US dollar slid in late trading on Tuesday as an inverted US Treasury yield curve sparked general concerns about a slowdown in US economic growth.
Furthermore, in the credit markets, he highlighted the borrowing costs of high yield businesses had increased by over 1% and 0.25% for investment grade companies.
The Dow Jones Industrial Average fell 701.59 points, or 2.72 percent, to 25,124.84, the S&P 500 lost 76.6 points, or 2.75 percent, to 2,713.77 and the Nasdaq Composite dropped 239.86 points, or 3.22 percent, to 7,201.65. The interest rate on 5-year treasuries fell slightly below the interest rate on three-year treasuries.
However, investors are increasingly concerned by a flattening of the spread between 2-and 10-year Treasuries, a more fundamental benchmark of market health.
Even if the more important parts of the yield curve flip to inversion, that doesn't mean a recession will happen the next day. For investors, though, it's a big deal for one simple reason: An inverted yield curve is often the dark cloud that precedes the storm.
Given the current functioning of the world economy, "arguments are made that a flatter yield curve has less of a signal embedded in it" about coming economic performance.