One of the most reliable warning signals for a recession just got a bit brighter.
Benchmark US Treasury yields fell back below 3 percent on Monday, and yields on two maturities at the front of the curve dove below longer-dated 5-year notes for the first time in more than decade, as risk appetite sparked by a US-China trade agreement faded.
For the most comprehensive local coverage, subscribe today. It's hard to say - but we prefer this explanation: Since December 2015, the Fed has implemented a series of 6 interest rate hikes and simultaneously cut its balance sheet by $50B a month.
Signals from the Federal Reserve last week that it may be nearing an end to its three-year rate hike cycle has pushed the 10-year U.S. Treasury yield to three-month lows below 3 percent. By Tuesday afternoon, the five-year yield was at 2.78 percent, 0.01 percentage points lower than a two-year Treasury and 0.02 points lower than a three-year Treasury.
And then the yield curve inverted.
No, at least not yet.
Those potential explanations aside, the US economy is in the middle of its second-longest expansion on record, and economists and investors are mindful that a downturn is inevitable.
"This solidifies not only my flattening bias but I think it will lead many players in the market who [expected the yield curve to steepen] to capitulate on that", Ian Lyngen, head of united rates strategy at BMO Capital Markets, told CNBC.
So far, there has been no inversion of the two-year and 10-year.
The US dollar slid in late trading on Tuesday as an inverted US Treasury yield curve sparked general concerns about a slowdown in US economic growth.
The 30-year yield touched 3.129 percent, the lowest level since Sept 18. Benchmark 10-year notes gained 13/32 in price to yield 2.966 percent the lowest since September 13.
Italian bonds extended their rally, with two-year yields falling 10 bps to 4 1/2-month lows after a cabinet official raised hopes that the government could cut almost four billion euros from its 2019 budget plans. Ahead of the 2001 recession, the entire curve dropped into inversion in sync in February 2000.
A precarious situation for the Fed undoubtedly and one that I believe they will be forced to respond to with either an outright suspension of rate hikes for the next six months - potentially skipping the expected rate hike this meeting as well - or with a rate hike accompanied by very strongly worded assertions that the Fed will not raise rates again for an extended period of time and that rate hikes may themselves be in store in the very near future.
Global equities have been shaken as a flattening U.S. Treasury yield curve fans worries about a recession, and on growing doubts that Washington and Beijing will be able to clinch a substantive trade deal during a temporary cease-fire agreed at the weekend.
While the risk of the entire yield curve inverting grows in anticipation of slower domestic growth, the economy appears on sure footing due to a solid job market and mild inflation.