inverted curve, when longer-dated yields fall below
shorter-maturity ones, has been a fairly reliable predictor of
U.S. economic recessions in the past.
The death toll from the coronavirus outbreak in China has risen
to more than 100 and the virus has spread to more than 10
countries, including France, Japan and the United States.
That has rattled world markets, fuelling concerns about the
impact on a world economy hit last year by a trade war between
the United States and China.
Investors in turn have rushed into safe-haven U.S. Treasuries,
with 10-year yields falling on Tuesday to 1.57%<US10YT=RR>,
their lowest since early October.
The gap between yields on three-month notes and 10-year
government bonds briefly fell to -0.015 basis points <US3MT=RR>
<US10YT=RR>, its lowest since October, before returning to
around 0.01 bps.
"The movement in the curve is probably telling us we are seeing
an increasing shift away from risk assets to safe assets,
including Treasuries, and the entire curve is being pulled
down," said Philip Shaw, chief economist at Investec.
"If the signs were to multiply, there could be a more severe
impact not just in China but globally. Markets are starting to
speculate the Fed could bring rates down by summer."
That three-month/10-year part of the yield curve is closely
watched as a recession indicator. It inverted in March last year
for the first time since the financial crisis, a signal that a
recession was likely to follow in one to two years.
The yield curve can revert and reinvert many times before a
It has traded in positive territory since October, when optimism
that the United States and China would reach a trade deal
boosted risk sentiment.
(GRAPHIC: U.S. curve inverts -
The two-year/five-year curve also inverted on Monday
<US2US5=RR>. The gap between two-year and 10-year yields
<US2US10=RR>, also considered a recession signal, was at the
flattest since Nov. 29.
Markets have ratcheted up expectations the Federal Reserve will
cut U.S. interest rates this year, fully pricing in one 25-
basis-point cut and a 50% chance of a second easing later in
2020, Fed funds futures show.
(Reporting by Dhara Ranasinghe and Sujata Rao; editing by Larry
[© 2020 Thomson Reuters. All rights
Copyright 2020 Reuters. All rights reserved. This material may not be published,
broadcast, rewritten or redistributed.
Thompson Reuters is solely responsible for this content.