How anxious should the Indian market be on US Treasury yield inversion?

A man is reflected on an electronic board showing a graph analyzing recent change of Nikkei stock index outside a brokerage in Tokyo

Markets have been rattled since Friday, when the 3-month U.S. Treasury yield exceeded the yield on the 10-year note, an inversion of the yield curve that is widely seen as an indicator of a recession.

Fed funds rate futures are now fully factoring in a rate cut later this year, with about an 80 percent chance of a move priced in by September. Historically, an inverted yield curve - where long-term rates fall...

But according to Janet Yellen, the former chair of the Federal Reserve from 2014 to previous year, the inverted yield curve this time is not as apocalyptic as it looks like.

To sum up, Capital Economics isn't expecting recession, but it is expecting slower US and global growth. That could be fuel for bond bulls to run prices even higher (and interest rates lower). It therefore shows how much it costs the United States government to borrow money over ten years compared with three months. However, a central bank pause is the responsible thing to do, Fed Bank of Boston president and CEO Eric Rosengren said at a conference in Hong Kong. That compares to the overnight benchmark targeted by the Fed, which now stands at 2.40 percent, and implies more than one full cut is priced in for this year. "There have been lots of signs that central banks in particular think that the global economy is slowing down".

The Treasury Department will sell $US113 billion in coupon-bearing supply this week, including $US40 billion in two-year notes on Tuesday, $US41 billion in five-year notes on Wednesday and $US32 billion in seven-year notes on Thursday.

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The speed of the decline in U.S. Treasury yields has also been fueled by a wave of mortgage-related hedging in the swaps market, said Credit Agricole's Li. The S&P 500 fell almost 2 per cent on Friday.

The U.S. bond market continued to send warning signs about the health of the economy on Wednesday, but investors in Canada shouldn't reach for the panic button just yet. "In the absence of very negative data or worsening of any of the long list of well known risks, the market is unlikely to take a strong view on further rate cuts and this argues for a V-shaped move in the 10 year". China's rapidly slowing economy and even a decelerating USA economy are top of mind as well. In the lead-up to the economic downturn that began in December 2007, this part of the curve initially dipped below zero about 23 months before the recession started.

"How useful is Canada's yield curve as a predictor of recessions?"

"The world is looking to fade the risk aversion caused by the inversion of the [US] yield curve", said Société Générale strategist Kit Juckes, adding that it was hard to position for a hypothetical recessions anyway. Central banks remain supportive, with the Fed on hold and the European Central Bank announcing more credit for European banks.

" There's little standing in the way of lower UST yields the rest of this month", Jim Vogel, a strategist at FTN Financial, wrote in a note. "The last five days now is largest volume period of 2019, setting up still more volatility next week as fresh data make their appearance", Vogel wrote in a note.

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