The bond market has officially shut down its recession alert, pointing to the potential for stronger growth.
Since the summer, when fears of a global economic collapse hit the bond market, conditions on the financial market and in the economy have worsened. Similarly, the prospects for trade talks between the US and China, and as a result, yields on bonds move against the price rise. do not rise as fast as long duration yields. Thursday's 2-year high was 10 basis points higher, but the 10-year yield was reported to have rallied around 14bps, according to reports that tariffs could be lowered. The 1
The 10-year yield has also been at its highest level since August 1, the day that Trump tweeted it could impose new tariffs on China, a negative event for the markets , It was also the day after the first of three interest rate cuts by the Fed by a quarter of a point.
Short-duration returns are no longer higher than long-end yields, such as the 10-year benchmark yield. This phenomenon is referred to as an inverted yield curve and is a signal in the financial markets that a recession could be in sight. This mood reached its peak in late August and September.
Now the curve has flattened and the tightly observed spread of 3 months to 10 years is at its highest level since last January, one month after the Federal Reserve's last rate hike. 3-month Treasury bills returned 36bps below the 10-year bond yield on Thursday, down from 54bps in August.
"One way to interpret the flattened or inverted yield curve is as follows: This is a possible indicator of a monetary policy error and we see that the likelihood of such a mistake is significantly reduced, despite a tight labor market and a near-high stock level has cut the Fed three times, "said Jon Hill, senior rate strategist at BMO. "Economic momentum may have bottomed out, with worries over the slowdown in manufacturing and the global synchronized recession seeming to have been overcome." In the short term, however, they do not see a 10-year move of more than 2% as markets are watching trade and economic data. Hill said the next high for the 10-year year is 2.06, the high for the 1st of August.
Greg Faranello, head of US interest rates at Amerivet Securities, sees yields continue to rise.
"The ability To make the yield curve steeper, the headwind must come from the global macro side and the long end more than the short one." The momentum is clearly geared to trading that the market is not really prepared for, "he added The 10-year rate could rise above 2% in the near future.
"Ultimately, you have to choose your seats, 2.25% is a level I would say: what are the ratings?" But right now that will feed itself, "he said.
At a historical level, the curve is not so steep, but the spread from 3 months to 10 years has shifted more than 90 basis points, from the largest reversal point at the end of August
"If you lower the key interest rate by 75 basis points, you can steepen this curve by 93 basis points. In general, it looks more and more as if the Fed could reach its key interest rates. "" Gentle landing. It is by no means a concluded agreement. This requires that the trade agreement be finalized and the positive economic data continue, "said Hill.
Fred Imbert of CNBC contributed to this story.