The US Treasury yield curve inverted on Wednesday for the first time since 2007, sparking fears of an economic recession. The 10-year US Treasury note’s yield fell below that of the 2-year note, a phenomenon that has preceded each of the seven past US recessions since 1969. The inversion of the curve partly resulted from escalating trade tensions between China and the US, causing investors to purchase longer-term bonds as a safe haven from risks surrounding the global economy and share prices. Subsequently, demand for short-term US Treasuries underperformed longer-term bonds. Chris Zaccarelli, Chief Investment Officer of Independent Advisor Alliance, has stated that these inversions occur when “markets believe we are headed into a recession” and that there is no guarantee that a recession will follow.
The prospect of the trade war between China and the US has been a significant concern for investors in recent months, resulting in the imposition of several rounds of tariffs on goods in both countries. On Tuesday, the Trump administration delayed the proposed 10% tariff on a range of Chinese consumer goods, including smartphones and clothing until mid-December, providing some relief from the trade war jitters. This decision sent US shares higher on Tuesday, but they subsequently fell on Wednesday following the yield curve’s inversion.
The inversion of the yield curve, typically a reliable predictor of a recession, has generated jittery investors, though forecasters caution that there are other factors to consider when predicting an economic downturn. Furthermore, the US economy appears to be more stable than in past recessions – unemployment remains low, and consumer spending remains steady. Nonetheless, there are concerns that the global economic climate could pose a threat to domestic growth.
President Trump has previously dismissed concerns that the US would experience a recession under his tenure, predominantly due to his economic policies’ success. While his administration has claimed that the current yields are a reflection of a strong US economy and reduced demand for yields from the Federal Reserve, he has also called for a further cut to interest rates to combat potential risks to economic growth. However, the Federal Reserve has already made two interest rate cuts this year, which may prevent any further cuts due to concerns of added financial instability.
