2-Year and 10-Year Spread Goes Negative, Worrying Markets
Kevin Giddis, co-head of Fixed Income Capital Markets, weighs in on recent bond market events and current influencing factors.
The Treasury market is trading much higher this morning as the pace at which global growth is receding is pushing even more cash into the safe haven trade. Earlier in the week, it was data out of Europe; last night, it was China. Escalating tensions in Hong Kong, the potential for a no-deal Brexit and Argentina are simply adding to the despair. The bad news for global economies is stacking up much faster than most economists thought, so trying to keep up is exhausting.
Another shoe that dropped from this was that the spread between the 2-year note and the 10-year note went negative for the first time since 2007. You can now buy a 10-year note at 1.59% vs. a 2-year at 1.60%. While the Boston Fed has suggested that the better indicator of a recession is the relationship between the 3-month Treasury Bill and the 10-year note (which has been negative since late May), history is pretty clear about the inversion of 2’s to 10’s. The average period of time between the inversion and a recession is around 22 months, so it isn’t likely going to happen tomorrow, but the batting average of the last five recession after this particular inversion is 1.000. We also blew through the 2.10% barrier on the 30-year bond, seeking an all-time low yield of 2.03% in pretty short order, so you can see how quickly things are changing. News happens quickly and what one says on Wednesday could be old news on Thursday.
Bond volatility is as high as we have seen in three years and is showing no signs of abating. The significance of the 2-year/10-year inversion is having its effect on the equity market, gold and the dollar. I hate to mention tomorrow already, but there are a few economic numbers worth watching, like the Empire Manufacturing Index, Nonfarm Productivity, Retail Sales, Industrial Production and Capacity Utilization. I am not saying that those numbers, if they come in better than expected, will push yields back up; I am saying that if they come in weaker than their forecasts, it will likely just add more fuel to a pretty big flame.
Dow futures are suggesting that the opening of the stock market today will all but wipe out yesterday’s gains. While we don’t know how long the 2/10 curve will remain inverted, what we do know is almost everything is upsetting the markets these days, and this inversion is pushing many to the brink of losing what was a deeply-rooted optimism for economic growth and equity prices.
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