It’s a view Federal Reserve officials are playing close attention to as global risks from the virus mount. In an interview with Bloomberg TV, Fed Vice Chairman Richard Clarida played down the inversion and said the negative spread is “really driven not so much by an outlook for the U.S. economy, but globally.” When there’s uncertainty money flows to America, he said, so current yield moves don’t reflect the U.S. outlook.
Campbell Harvey is credited with drawing the link between the slope of the yield curve and economic growth. The professor at Duke University’s Fuqua School of Business says corporate America is much more attuned to the yield curve signal and will take preventative action.
“CFOs and CEOs are more aware and aren’t likely to take on the risk of just ignoring it,” Harvey said. “They are being a little more cautious now.”
The gap between the yield on three-month and 10-year Treasuries recently slipped to as low as about minus 6 basis points. The spread -- which has inverted before each of the past seven U.S. recessions -- had initially fallen below zero in March 2019 as economic conditions deteriorated at the height of the trade war. The spread between two- and 10-year yields, which was negative as recently as September, remains above that mark at 17 basis points.
On Wall Street, strategists at JPMorgan Chase & Co. still see plenty of reason to fret the slope of the curve. Their favorite indicator -- and a part of the curve that remains inverted -- is the gap between two-year forward and one-year forward rates, which can shed light on the bond market’s expectations of what the Fed will do.
In this case, it shows a “rising probability of a more protracted Fed rate cut cycle extending to 2021,” said Nikolaos Panigirtzoglou, a strategist at JPMorgan.
For now, there aren’t many other alarm bells in an American economy with unemployment rates near 50-year lows and the longest stretch without a recession since World War II. Even so, economists forecast that GDP growth will slow to 1.8% compared with 2.3% in 2019, and it’s too early to determine whether the coronavirus outbreak in China will significantly affect the U.S. economy.
“When Treasuries become most dominant, investors from anywhere in the world naturally buy of lot of these bonds when they want a safe haven,” said Jen. “The yield curve in the U.S. is increasingly reflecting the fears of the rest of the world.”
--With assistance from David Westin.
This article was provided by Bloomberg News.