An inversion in US Treasury yields, a solid and reliable predictor of past recessions, is at most two years away and perhaps only a year off, according to bond market experts polled by Reuters who have brought their forecasts nearer. While there is still plenty of optimism around the global economy, there are signs that growth in several economies has already peaked, putting a brake on stock markets and sending rising bond yields back in the other direction.
The real risk of a global trade war as a result of US President Donald Trump's tariff spree also suggests more trouble ahead, according to foreign exchange and stock market strategists and fund managers. The latest survey of over 80 bond strategists taken June 25-28 comes days after a Reuters poll of economists showed rising recession risks in the US economy, where growth momentum is due to wane in the second half.
"The days of above 3 percent yield on the 10-year Treasury seem now in the distant past, and there is a feeling in some quarters that we may have already seen the peak yield for the year," noted Bruno Braizinha, interest rates strategist at Societe Generale. "The recent bout of geopolitical uncertainty and newsflow on trade wars and emerging markets has helped keep the yield under 3 percent. The Fed helped by delivering a hawkish surprise at its June meeting, which may risk frontloading the timing of a US slowdown - our economists' core scenario is for a recession in late-2019/early-2020," added Braizinha.
The US 10-year yield rose to over 3 percent last month for the first time in more than seven years. That came in part on an expected increase in Treasury supply to fund a swollen budget gap from aggressive tax cuts passed by Congress late last year.
But it has since plunged about 30 basis points from its recent peak to a four-week low of 2.83 percent on rising concerns about a trade war, despite also-mounting confidence about Federal Reserve interest rate hikes being delivered steadily through this year and next.
That diverging view on long-term growth and short-term interest rates has pushed the yield differential between two-year and 10-year notes to just 32 basis points, the narrowest gap since 2007 at the start of the last recession.
The yield curve inverts when the yield on short-term maturities is higher than longer-dated ones. In a strong economy set for a long expansion, the reverse is the norm, as investors demand higher returns for holding bonds for longer.
US 10-year Treasury yields are forecast to rise by about 50 basis points from here to 3.30 percent in a year, with two-year yields due to rise by more, to 3.05 percent.
That would bring the yield gap to about 25 basis points in a year, the lowest since over a decade ago, and around the time when much of the world was about to plunge into the worst global recession since the Great Depression.
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