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US yield inversion spreads on worries about slowing growth

NEW YORK: The premium between shorter-dated US Treasury yields above longer-dated ones rose on Tuesday, spreading th

Dec 04 2018

NEW YORK: The premium between shorter-dated US Treasury yields above longer-dated ones rose on Tuesday, spreading the inversion of the yield curve between more maturities as traders piled on bets on a slowdown in US economic growth.

The two-year yield briefly rose above the three-year yield for the first time since January 2008. Two-year and three-year yields held above the five-year yield for a second day, Tradeweb data showed.

Expectations that business and consumer activity would fall in the coming months spurred buying of longer-dated Treasuries, sending the benchmark 10-year yield to its lowest levels since mid-September.

The inversion of the two-year and 10-year yields preceded the past three US recessions.

So far, that inversion has not occurred. The 10-year yield held a 12-basis-point margin over its two-year counterpart, although it was the smallest one in over a decade.

"It doesn't signal there's a recession anytime soon. It is signaling expectations of a growth slowdown," Deborah Cunningham, chief investment officer of money markets at Federated Investment Management Co. in Pittsburgh, said of the parts of the curve that inverted.

At 11:37 a.m. EST, the 10-year Treasury yield fell five basis points to 2.939 percent after hitting its lowest level since Sept. 11.

The 30-year yield touched 3.198 percent, the lowest since Oct. 3.

Concerns about weaker growth have also stoked bets the Federal Reserve would end its campaign to raise interest rates sooner than previously thought, analysts said.

The futures market implied traders expect the US central bank will raise rates by a quarter percentage point to a range of 2.25 percent to 2.50 percent at its next policy meeting on Dec. 18-19, according to CME Group's FedWatch program.

However, they scaled back their expectations of two rate hikes in 2019 to less than 10 percent, down from 59 percent a month ago.

The traders' reduced outlook on the number of future Fed rate hikes did not change following upbeat remarks on the economy from New York Fed President John Williams.

"Given this outlook I describe of strong growth, strong labor market and inflation near our goal - and taking into account all the various risks around the outlook - I do continue to expect that further gradual increases in interest rates will best foster a sustained economic expansion and a sustained achievement of our dual mandate," Williams told reporters.

US stock and bond markets will be closed on Wednesday for a national day of mourning for former US President George H.W. Bush, who died on Friday.

Copyright Reuters, 2018