Treasury Yield Drops to New Lows as Economic Concerns Deepen
Equity markets once again fell under pressure on Wednesday as economic growth concerns continued to deepen. Reflecting these concerns, the U.S. 10-year Treasury yield fell to new lows – a 15-month low to be precise. Not since December of 2017 has this benchmark government bond yield fallen to such depths.
Fed Concerns, Inverted Yield Curve Hint at Recession
As we noted earlier this week, the 10-year and 3-month Treasury yields inverted late last week for the first time since 2007. And they remained inverted as of Wednesday. An inverted yield curve occurs when longer-term debt has a lower yield than shorter-term debt. It’s a rather uncommon phenomenon that economists consider to be a relatively reliable signal of an upcoming recession. But the onset of such a recession can often range from several months to years after a yield curve inversion.
Exacerbating market worries about economic growth has been none other than the U.S. Federal Reserve. Last week, the major Fed announcement was even more dovish than previously expected. The central bank unexpectedly lowered economic growth (GDP) expectations and called for no rate hikes in 2019.
Will the Fed Cut Interest Rates?
The key question regarding the Fed has transformed dramatically within the past several weeks. Prior to last week’s dovish Fed decision, the question was all about whether the central bank would continue hiking rates in 2019. And the Fed clearly said ‘no’. Now, it’s all about whether the Fed should begin cutting interest rates. There are now increasing calls to do so in response to slowing global economic growth. If rate cut expectations get any stronger, government bond yields could very well extend their plunge.
What May Happen Next?
On Thursday, the U.S. Bureau of Economic Analysis will release the final U.S. Gross Domestic Product (GDP) reading for the fourth quarter of 2018 (check our Market Events & Earnings Calendar for more). Though it’s lagging like other economic indicators, GDP is at the root of current economic worries. Economists are expecting Q4 annualized GDP growth to come in at 2.4%. Any significant deviation from these expectations will very likely make a substantial impact on Treasury yields, bond prices, and equity markets.
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Senior Market Analyst at The Technicals
A veteran global macro trader/analyst, Bart focuses on major market moves in currencies, commodities, fixed income, and global equity indexes. Bart stresses inter-market correlations and dynamics while keeping a close eye on risk. He has published countless market analysis pieces and has been a guest expert for a variety of major financial media. Contact Bart