New York-listed shares tumbled more than 3 per cent
09 December, 2018, 04:26
"The yield curve has sent a chill down investors' spines in regard to the future outlook of the USA economy", said Chad Morganlander, senior portfolio manager at Washington Crossing Advisors in New Jersey.
The yield curve inverted between the 2- and 10-year yield before the recessions of 1981, 1991, 2000 and 2008. One portfolio manager called the inverted yield curve a "harbinger of doom". This is seen as a portent of a USA recession. As of Tuesday morning, the yield on the benchmark 2-year Treasury note hovered at 2.821 percent, above the yield on the 5-year note at 2.811 percent.
The dollar trimmed some of its recent losses but remained under pressure on Wednesday, as an inversion in part of the Treasury yield curve raises concerns about a potential United States slowdown.
Concerns about slowing US growth have accelerated the flattening of the yield curve, a phenomenon in which longer-dated debt yields fall faster than their shorter-dated counterparts.
In separate remarks on early December 3, Fed vice chair Randal Quarles said the central bank, while "data dependent", was following a strategy that would not be thrown off course by "every wavering" of economic statistics.
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.
"We should be data dependent but not reacting to every wavering of the needle across the dial..." "We are following a strategy and taking account of data over time as it comes in and in response to significant changes in direction".
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Risk markets were also weighed down as optimism faded over a truce made over the weekend between U.S. President Donald Trump and Chinese President Xi Jinping.
Traders are even starting to bet that the Fed will cut interest rates as soon as 2020.
Though it is not certain the narrowing in spreads is related to doubts about economic growth, alternate explanations would not necessarily be helpful to the Fed either. "Keep it simple. Quantitative Tightening is bad for stocks".
Lyngen said the inversion of 3- and 5-year yields has increased the likelihood that an inversion of the 2- and 10-year yield will happen in late 2018 or early 2019. "Lower inflation expectations, induced mostly by the drop in oil prices and also in part by soft inflation data; and a lower term premium, likely pushed down by deteriorating sentiment about global growth". However, when investors expect interest rates to decline in the future - typically because of a weak economy - they scramble to lock in today's comparatively high interest rates for as long as possible.
The outlook for US growth, by contrast, he said remained strong.
Fed officials have cited these developments that bear watching, but several of them have repeatedly cautioned about the inversion of yield curve as the most reliable indicator that a recession is on the horizon.