The spread between yields on the two sides of the coin and 10-year Treasury Flipped Wednesday morning as the shorter-duration debt rose above the level of the benchmark rate. That's a classic recession indicator, predicting the past seven periods of negative U.S. growth.
The Fed has already come to expect to cut its own funds rate by a quarter percentage point.
A 25 basis point move "is still our base case," said Bill Merz, head of fixed income research at US Bank Wealth Management.
Fears that a global slowdown could eventually send the U.S. into recession have fueled market turbulence, with more than 2% Wednesday amid the bond market tumult. Signal is still a yellow flag '
Despite the jolt to
Market pricing Wednesday, September 30, 2009 at 9:20 am, September 9th, 201
The yield curve inversion was not being viewed as an automatic recession indicator, despite its strong predictive power in the past. Market experts view this inversion as at least partially fueled by some elements that have not been presented in previous cases.
Jason Draho, Head of Americas Asset Allocation at UBS Global Wealth Management said: "At a minimum, this is a yellow flag.
One of those factors, which Fed officials have cited at various times when discussing the flatness of the yield curve, is term premia.
The term premium for the 10-year note has dropped to minus 1.22, according to a New York Fed estimate that is the lowest on record. In other words, investors are demanding a very low premium, putting further downward pressure on yields.
"I think they would want to get the curve not to be inverted," Draho said. "If things get worse over the next few weeks in terms of economic data, in terms of trade tensions, it's possible they could go 50 that direction. "
To be sure, markets are far from sanguine about the inversion and what it wants to mean to a Fed between those who prefer a more cautious approach that leaves policymakers with more ammunition in case of a steeper downturn against those
David Rosenberg, the senior economist.
Market voices have been clamoring for lower rates, just nine months after the recent one and strategist at Gluskin Sheff, warned clients in a note Wednesday against "folks [who] wants to dismiss the message from the flat shape of the yield curve."  Should that message persists, it's likely to get the Fed's attention.
"The yield curve has been making it abundantly clear that short-term rates are too high." Bank's Merz said. "We're seeing a lot of uncertainty and negative sentiment in the market." That's not all. "