US yield inversion deepens

29 Aug, 2019

The US yield curve inversion deepened on Tuesday to levels not seen since 2007, rekindling fears of a looming recession that spurred a sell-off on Wall Street and stoked even more safe-haven demand for government bonds.
The intense interest in Treasuries supported demand for $40 billion worth of two-year government debt for sale, part of this week's $113 billion fixed-rate Treasury supply.
The yield curve often inverts prior to a US recession.
"As the curve inverts further, it has inspired more long-end buying," said Mike Lorizio, head of Treasuries trading at Manulife Asset Management in Boston. The Treasury Department sold its latest two-year, fixed-rate note supply at a yield of 1.516%, which was the lowest at an auction of this maturity since September 2017.
The Treasury will sell $41 billion of five-year notes on Wednesday, followed by a $32 billion auction of seven-year debt on Thursday. It will also offer $18 billion in floating-rate notes on Wednesday.
On the open market, 10-year Treasury yields were 1.488%, down 5.60 basis points on the day. They reached a three-year low of 1.443% on Monday.
The yields on two-year notes were 1.531%, down 2.00 basis points. On Monday, they declined to 1.449%, the lowest since September 2017.
The three major Wall Street indexes were lower, wiping out their initial increase.
The spread on three-month T-bill rates over 10-year yields grew as wide as 52 basis points, a level not seen since March 2007, according to Refinitiv data. The deepening curve inversion reflects investors' nervousness about a recession and uncertainties over the trade conflict between China and the United States.
"It's not a sign of confidence in inflation or a pickup in growth," Lorizio said.
US President Donald Trump on Monday said he expected a trade deal with China after positive gestures by Beijing following a global stock market rout last week. China's Foreign Ministry said on Tuesday it had not heard of any recent telephone call between the United States and China on trade. This raised doubts whether the world's two biggest economies can reach a trade deal in the foreseeable future.

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