Yields fall, curve flattens as trade deal boost fades

Yields fall, curve flattens as trade deal boost fades

US stocks slumped almost three percent on Tuesday on some of the same growth concerns influencing bond investors as well as on doubts China and the United States would resolve their trade spat. "It's the what-if scenario".

"This is the first part of the curve to become inverted for some time and could suggest a need for rates to be cut in the relatively near term", he warned. The yield curve between two-year and 10-year notes flattened to 14.5 basis points, the flattest in over a decade.

No - and that's why this latest flip in yields may not augur recession. Ahead of the 2001 recession, the entire curve dropped into inversion in sync in February 2000.

However, investors are increasingly concerned by a flattening of the spread between 2-and 10-year Treasuries, a more fundamental benchmark of market health.

"The Federal Reserve may slow down the pace with which it hikes interest rates, but it won't lower rates yet, so the likelihood there will be an inversion of these is low", Sera said.

Gundlach is founder and chief executive of DoubleLine which manages more than $120 billion, according to its website. It's a sign investors are unmoved by a potential slowdown in the Federal Reserve's interest-rate-hiking program.

Hedge funds and other speculators had amassed a record level of bets on declines in Treasury prices through the futures market, with the heaviest bets lodged against 5-year maturities.

Whatever the situation with the Fed and the USA markets, emerging markets may be effected even more than the US economy. In its view, those rate hikes are putting the brakes on borrowing and hiring, keeping inflation under control.

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Those potential explanations aside, the USA economy is in the middle of its second-longest expansion on record, and economists and investors are mindful that a downturn is inevitable. "While the current environment is somewhat special - with low interest rates and risk premiums - the power of the term spread to predict economic slowdowns appears intact".

"In the initial phase of the inversion of the yield curve markets are anxious about whether there'll be a recession", said Masafumi Yamamoto, chief currency strategist at Mizuho Securities.

Some traders said the dramatic curve flattening may be overdone and may revert if the government's November payrolls report out on Friday were to show solid jobs and wage growth.

"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, the head of united rates strategy at BMO Capital Markets, told CNBC.

The Fed has blown three major bubbles in 18 years.

Along with the renewed narrowing of the yield curve, economists on December 3 were parsing a conflicting set of new data.

Lyngen said the inversion of three- and five-year yields had increased the likelihood that an inversion of the two- and 10-year yield would happen by early 2019.

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