Treasury bonds in the US and UK are today experiencing inverted yields for the first time in over a decade. High demand for bonds is pushing the yield offerings down as the treasuries involved need less incentive to attract investors, meaning they have little need to offer much – or any – long-term profits.
The US Treasury 10-year bonds are currently yielding 1.62%, while the UK Treasury 10-year bonds are at a lower 0.46%; their worst since 2007 and 2008 respectively. The significance of these weak bond yields is that they typically serve as an indicator of looming recession; a fear that has been in the back of investor minds in recent months.
U.S. 10-YEAR YIELD BELOW 2-YEAR RATE FOR FIRST TIME SINCE 2007 https://t.co/MERnbh5uTq pic.twitter.com/afvf3VvojE
— Bloomberg Markets (@markets) August 14, 2019
Oh look, it's another one. U.K. yield curve is inverted for first time since 2008.https://t.co/R1s62J5KDp by @johnainger & @greg_ritchie pic.twitter.com/6CUMEqsJJ7
— Tracy Alloway (@tracyalloway) August 14, 2019
Treasury bonds, along with gold and the Japanese Yen, are seen as a less risky investment option in times of economic crisis or slowdown – as we’re currently experiencing with the ongoing US/China trade war, Brexit, and the Eurozone struggles. Gold has gained over 10% value in the past month, and almost 25% in last three months, indicating similar levels of demand to hedge risk.
It’s all doom and gloom in the bond markets as investors flee into safe-haven assets. pic.twitter.com/bHp8Xp3u1a
— Holger Zschaepitz (@Schuldensuehner) August 14, 2019
Jasper Lawler, Head of Research at London Capital Group, pointed out that based on previous negative yield curves, the expected decline in the US economy would time perfectly with the US presidential elections in 2020.
Assuming yield curve inversion is calling a recession in 12-18 months - that would put it slap bang in time for the 2020 US election
— Jasper Lawler (@jasperlawler) August 14, 2019
-- can see why Trump keen on rate cuts
The next step for investors and analysts will be to watch the stock market reactions. Asia and Europe are already struggling following poor economic data. The Eurozone’s growth has halved from 0.4% to 0.2%, while China registered its worst industrial production growth for 17 years. If the US markets react badly to the inverted yield curves, then we could see bond yields fall further, while investment gold and the Yen could make fresh gains.
In this scenario it is likely that President Trump will make fresh calls for further interest rate cuts. The Federal Reserve already made a u-turn this month to drop rates by 0.25%, and economists are predicting up to three more quarter-percent cuts before 2019 is over. There are investors and experts who are unhappy about the pressure from the president however, and who feel that his approach to criticise Jerome Powell (Fed chairman) repeatedly in the press has been a level of interference that is inappropriate; regardless of whether Trump was right or wrong about monetary policy.
UPDATE: Thursday 15th August
It took less than 12 hours for President Trump to come out and do exactly as was suggested above. Timely.
We are winning, big time, against China. Companies & jobs are fleeing. Prices to us have not gone up, and in some cases, have come down. China is not our problem, though Hong Kong is not helping. Our problem is with the Fed. Raised too much & too fast. Now too slow to cut....
— Donald J. Trump (@realDonaldTrump) August 14, 2019
..Spread is way too much as other countries say THANK YOU to clueless Jay Powell and the Federal Reserve. Germany, and many others, are playing the game! CRAZY INVERTED YIELD CURVE! We should easily be reaping big Rewards & Gains, but the Fed is holding us back. We will Win!
— Donald J. Trump (@realDonaldTrump) August 14, 2019