August 14, 2019 / 3:32 PM / 2 months ago

REFILE-TREASURIES-U.S. yield curve inverts for 1st time in 12 years, flags recession

 (Corrects typographic error in 4th paragraph to make RIC for
yield curve US2US10=TWEB instead of US2US10YT=TWEB)
    * U.S. 30-year yield hits record low
    * U.S 30-year bond futures show yield could hit below 2%
    * U.S. 10-year yield hits weakest level since Sept. 2016

    By Gertrude Chavez-Dreyfuss and Dhara Ranasinghe
    NEW YORK/LONDON, Aug 14 (Reuters) - The U.S. Treasury yield
curve inverted on Wednesday for the first time since June 2007,
in a sign of investor concern that the world's biggest economy
could be heading for recession. 
    The inversion - where shorter-dated borrowing costs are
higher than longer ones - saw U.S. 2-year note yields rise above
the 10-year yield.
    Weak economic data and low inflation around the world,
global trade conflicts and political tensions in places such as
Hong Kong have sparked worries about world growth, fueling
market expectations of central bank interest rate cuts and
triggering steep falls in government bond yields.
    The U.S. curve inverted on Wednesday to as much as minus 2.1
basis points, a metric widely viewed as a classic
recession signal. The last time this yield curve inverted was in
June 2007 when the U.S. subprime mortgage crisis was gathering
    The U.S. curve has inverted before every recession in the
past 50 years, offering a false signal just once in that time
    The curve was last up 1.4 basis points.
    Jeffrey Cleveland, principal and chief economist at
investment management firm Payden & Rygel in Los Angeles, said
he is more optimistic about the timeline for a recession.
    "We look at 2s/10s and the yield curve in general as long
leading indicators," Cleveland said. "Long because a long period
can elapse between inversion and a recession. For example,
2s/10s inverted in December 2005 and the recession did not begin
until December 2007: a full 24 months."
    With the inversion, U.S. benchmark 10-year yields fell to
1.574%, the lowest since September 2016, while 30-year yields
tumbled to a record low of 2.015%.
    "I don't think we have seen the bottom in yields yet as we
continue on this path of just absolute increased uncertainty,"
said Ellis Phifer, market strategist at Raymond James in
Memphis. "I think potentially the bottom could be the
1.30%-1.35% in the 10-year."
    In midday trading, U.S. benchmark 10-year Treasury note
yields were last down at 1.586%, from 1.68% late on
    Yields on 30-year bonds slid to 2.04% from
2.137% on Tuesday.
    While the yield on nominal 30-year bonds had not yet broken
below 2% for the first time ever, Treasury futures market
signals indicated an expectation that it would do so soon. The
implied yield on the 30-year Treasury futures contract expiring
in September was 1.74% on Wednesday, near a record low.
    At the short end of the curve, U.S. 2-year yields fell to
1.571% from Tuesday's 1.669%.
    In March, the inversion of the U.S. yield curve hit 3-month
T-bills for the first time in about 12 years when the yield on
10-year notes dropped below that for 3-month
    That metric reverted back and then inverted again in May.
Over that period, the 2- to 10-year curve did not invert.
    Some have cast doubt on how accurate the yield curve remains
as a recession predictor after a decade of multitrillion-dollar
central bank money-printing stimulus.
    "The supply-demand dynamics for safe assets are different
and to some degree it explains why the curve inversion may last
longer without portending recession than during past episodes," 
   Tim Graf, chief macro strategist at State Street Global
Advisors said.
      August 14 Wednesday 11:10AM New York / 1510 GMT
                               Price        Current   Net
                                            Yield %   Change
 Three-month bills             1.92         1.9615    -0.046
 Six-month bills               1.86         1.9089    -0.054
 Two-year note                 100-90/256   1.5669    -0.102
 Three-year note               99-248/256   1.5107    -0.093
 Five-year note                101-72/256   1.481     -0.087
 Seven-year note               102-72/256   1.5282    -0.090
 10-year note                  100-92/256   1.586     -0.094
 30-year bond                  104-168/256  2.0417    -0.095
   DOLLAR SWAP SPREADS                                
                               Last (bps)   Net       
 U.S. 2-year dollar swap         0.00         1.75    
 U.S. 3-year dollar swap        -4.00         0.25    
 U.S. 5-year dollar swap        -6.50         0.00    
 U.S. 10-year dollar swap      -11.25        -0.75    
 U.S. 30-year dollar swap      -40.50        -1.25    
 (Reporting by Gertrude Chavez-Dreyfuss in New York, Dhara
Ranasinghe in London and the London Markets team; Additional
reporting by Dan Burns; Editing by Jonathan Oatis)
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