January 19, 2019

Stocks slide as falling USA yields, trade worries knock sentiment

09 December 2018, 04:25 | Hattie Nash

Stocks slide as falling USA yields, trade worries knock sentiment

Stocks slide as falling USA yields, trade worries knock sentiment

Whatever the reason, investors and economists ignore this message from the bond market at their peril: yield curve inversions - when shorter-dated securities yield more than longer maturities - have preceded every USA recession in recent memory by anywhere from 15 months to around two years. "It's the what-if scenario".

Ayako Sera, market strategist at Sumitomo Mitsui Trust Bank, said there is proof that an inversion between three-month Treasury bills and 10-year Treasury notes precedes a recession. The benchmark 10-year yield clung to an 11-basis-point margin over its two-year counterpart, although it was the smallest in over a decade.

"I think the dollar can be in correction-mode in a yield-curve inversion environment", he added. A survey of supply managers indicated manufacturing output would grow, but the same survey indicated weaker prices; meanwhile, a decline in construction spending led some analysts to mark down their forecast for gross domestic product growth.

Gundlach said the Fed will need to be especially careful in its choice of words when they meet this month to deliver on their promised rate hike.

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LONDON, Dec 5 (Reuters) - Global stocks tumbled to one-week lows on Wednesday, as declines by long-dated USA bond yields and a renewal of trade concerns stoked fears of a downturn in the United States, the world's largest economy.

Jeffrey Gundlach, chief executive officer of DoubleLine Capital and a closely watched bond investor, comes down on the side of it being a fundamental signal.

Markets are also bracing for more news on the Brexit front.

The yield curve had steepened sharply coming out of a September Fed meeting at which rates were raised, when the yield difference between two-year and 10-year Treasury securities widened from 0.22 percentage point to 0.34.

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President Donald Trump suggested Tuesday that he could extend a 90-day truce in his trade war with China, while his top White House economic adviser backtracked from the president's announcement that Beijing had agreed to reduce tariffs on US -made cars.

Dallas Federal Reserve bank president Robert Kaplan said the Fed was now in a "more challenging" period as global growth slows and parts of the American economy begin feeling the impact of Fed interest rate increases. It reflects the idea that the Fed is slowly hiking the economy into recession.

The Fed has blown three major bubbles in 18 years. Kaplan, a former Goldman Sachs banker who says he looks at the yield curve several times a day, said December 3 the narrow gap between two-year and 10-year Treasuries reflects expectations of sluggish global growth.

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