US Treasury yields are tumbling (along with German bund yields) as 2019 opens up with a broad risk-off sentiment and global growth scare.
30Y Yields are back below 3.00% and 10Y hit 2.60 handle – its lowest since January 2018…
All of which – confused by shutdown fears, liquidity concerns, repo rate carnage, and The Fed’s QT – has left the yield curve of the supposedly most liquid bond market in the world in a total mess of inversions… from 1Y through 8Y is now inverted…
And as Bloomberg reports, this inversion reinforces the warnings from a market indicator watched by the Fed as one of the most accurate gauges of economic health is pricing in lower rates for the first time in more than a decade.
This little-known near-term forward spread, which reflects the difference between the forward rate implied by Treasury bills six quarters from now and the current three-month yield, fell to -0.0653 basis point on Wednesday.
It was the first time since March 2008 the gauge — seen as a proxy for traders’ outlook on Federal Reserve policy — fell below zero.
Crossing the threshold indicates the market sees easier policy and recession in “the next several quarters,” economists at the U.S. central bank wrote in a research paper dated July 2018.
“When negative, it indicates market participants expect monetary policy to ease, presumably because they expect monetary policymakers to respond to the threat or onset of a recession,” Eric C. Engstrom and Steven A. Sharpe wrote.
“When market participants expected — and priced in — a monetary policy easing over the next 18 months, their fears were validated more often than not.”
If equities are right – the massive underperformance of cyclicals relative to defensives – then Treasury yields have a long way to fall…
But in the short-term, we wonder how much of last week’s buying panic in stocks will hold?
via RSS http://bit.ly/2CKCphn Tyler Durden