One of the most reliable warning signals for a recession just got a bit brighter.
Nevertheless, the outlook for the dollar remains bearish in the near term due to declining Treasury yields and renewed concerns over economic growth.
The greenback, which started the week on a weak footing as the apparent thaw in trade tensions between the USA and China cooled demand for the safe-haven currency, extended its fall as investors anxious about the inversion of the short end of the US yield curve in bond markets. While it has been shrinking its holdings for more than a year, its bond portfolio remains the world's largest and is seen as a force in suppressing longer-dated yields.
Typically, bonds with longer maturities offer higher yields, as investors demand greater compensation to keep their money locked away for longer time periods.
For the most comprehensive local coverage, subscribe today. This happens when short-term rates rise above longer rates.
"It's a sloppy predictor because at some point after yield curve inversion you could get a recession that could be one year, two year, three years", said Nicholas Colas, co-founder at DataTrek Research in NY. The Australian dollar was down 0.5 per cent at $0.7307.
According to the San Francisco Fed, each of the nine USA recessions that have occurred since 1955 came between six months and 24 months after a an inversion in the yield curve of two-year and 10-year Treasury yields.
No, at least not yet.
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U.S. Federal Reserve officials convinced the massive U.S. bond market has fundamentally changed in the last decade are about to test their commitment to that idea against investors who have begun betting against the U.S. central bank's ability to continue raising interest rates.
However, traders scaled back their expectations of two rate hikes in 2019 to less than 10 percent, down from 59 percent a month ago.
So far, there has been no inversion of the two-year and 10-year. "Then a pile of negative Brexit news, Williams starts to ramp up hawkish talk, then we have our yield curve acting like it got run over and boom, we puke".
On Tuesday, the greenback shed almost 0.8 percent against the yen, which acts as a safe haven in times of geopolitical and financial turmoil as Japan is the world's biggest creditor nation.
Of course, that's still "pretty doggone tight", said Randy Frederick, vice president of trading and derivatives at Charles Schwab. In that situation, a 10-year note, for instance, may offer only a modestly higher yield than a 3-year note.
It is a plot of the yields on all Treasury maturities ranging from 1-month bills to 30-year bonds. That particular inversion has preceded every recession since the late 1970s. It was the first part of the Treasury yield curve to invert since the financial crisis, excluding very short-dated debt. Sometimes, yield curves can become inverted, a scenario in which short-term yields are higher than long-term yields.
However, despite its track record, many economists question the reliability of the yield curve for predicting recessions, including Powell.