Recession signal increases market pressure
By Wu Lejun
People's Daily app


Stocks fell sharply amid troubling economic data that could signal a global recession, August 15, 2019. (Photo: AP)

Washington (People’s Daily) - US stocks are weaker across the board while US Treasury yields  are upside down indicating lower long-term yields than short-term. Markets are worried that this is a sign of recession.

The data showed US Treasury yields fell on Wednesday, with the 10-year yield falling below the two-year yield, the two-year yield falling 9.4 basis points, and the 10-year yield falling 12.7 basis points. This means both short and long-term yields are inverted again, while 10-year and two-year notes are inverted for the first time since May 2007.

"Historically, the reversal of the benchmark yield curve means that we must now expect a recession to occur between today and six to 18 months from now, which significantly shifts our longer-term outlook for the broader market." Sevens Report founder Tom Essaye said Wednesday.

An upside-down yield curve is considered a recession hallmark as higher yields on short bonds than long ones mean less confidence in long-term investing, or investor expectations on future returns.

The three-month and 10-year yield curves, which the Fed pays more attention to, do not look pretty. The upside-down trend is becoming more pronounced, with three-month yields about 35 basis points higher than 10-year yields, which are still falling and are near their lowest levels since October 2016.

CNBC said the inversion was not viewed as an automatic recession indicator, despite previous accurate predictions. Market experts view this inversion as at least partially fueled by some elements that have not been present in previous cases.

“At a minimum, this is a yellow flag,” said Jason Draho, head of Americas asset allocation at UBS Global Wealth Management. “There are aspects of what’s going on that gives us a little more pause about how negative a signal this is, mostly due to technical factors.”

David Rosenberg, chief economist and strategist at Gluskin Sheff, warned clients on Wednesday against “folks [who] will continue to dream up ways to tell you to dismiss the message from the flat shape of the yield curve when instead it is them that you should dismiss.”

Over the past 50 years, every financial crisis has been preceded by a financial crisis, and there is a high probability of a financial crisis if the yield on three-month and 10-year Treasury bonds goes upside down.

Past experience suggests a financial crisis is bound to occur if yields on two-year and 10-year treasuries go upside down. Moreover, the federal reserve had already cut the federal funds rate in July, and the most sensitive reaction should be the 2-year Treasury bond yield, but after the rate cut, the 2-year interest rate did not fall, but the long-term interest rate has been lower. If this continues, the US economy is in danger.

Data from the national bureau of economic research (NBER) show that the US has gone through five recessions since 1978, with the 10-year and two-year yield curves upside down before each one. From the perspective of time hanging in advance, the earliest is 12 months, the slowest is 36 months, and the average is 22 months.

The performance of the US economy impacts the world. In its World Economic Outlook released in July, the International Monetary Fund (IMF) lowered its forecast for global economic growth in 2019 and 2020, forecasting 3.2 percent growth in 2019 and a rebound to 3.5 percent in 2020.

The IMF said trade tensions, car tariffs, and a no-deal Brexit could further hurt investment and supply chains and slow economic growth. Slowing global growth and falling core inflation have rekindled the risk of inflation.