Asian stocks fall as declining USA yields, trade woes knock sentiment

09 Décembre, 2018, 04:25 | Auteur: Auguste Feret
  • Investors had initially welcomed the trade truce that the Trump administration said was reached over the weekend in Buenos Aires between Presidents Donald Trump and Xi Jingping. But on Tuesday after a series of confusing and conflicting words from Trump

Yield curve inversions are seen generally as precursors of a recession. The yield curve between two-year and 10-year notes flattened to 14.5 basis points, the flattest in over a decade. "I think the dollar can be in correction-mode in a yield-curve inversion environment".

President Donald Trump suggested Tuesday that he could extend a 90-day truce in his trade war with China, while his top White House economic adviser backtracked from the president's announcement that Beijing had agreed to reduce tariffs on US -made cars. As of Tuesday morning, the yield on the benchmark 2-year Treasury note hovered at 2.821 percent, above the yield on the 5-year note at 2.811 percent.

Investors typically demand higher yields to commit money for longer periods of time.

Global equities have been shaken as a flattening U.S. Treasury yield curve fans worries about a recession, and on growing doubts that Washington and Beijing will be able to clinch a substantive trade deal during a temporary ceasefire agreed at the weekend.

After months in which concern about the yield curve had eased, its sudden narrowing on December 3 could disrupt what had seemed a strong consensus at the Fed to continue raising rates through 2019.

Interest rate hikes have sent short-dated yields higher, even as slowing economic growth expectations have kept longer-dated yields down.

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In the current instance, investors and economists are debating whether this warns of economic weakness ahead or if it reflects other factors, such as a recent reversal of large speculative bets on declining bond prices and the Federal Reserve's large holdings of Treasuries.

A central focus is whether it means the market is second guessing the Fed, which has been raising interest rates for three years and is expected to lift them further, including at their next meeting in two weeks. "We are following a strategy and taking account of data over time as it comes in and in response to significant changes in direction".

Weakening global growth, trade war fears, higher interest rates, and wariness over the extent of Federal Reserve tightening are weighing on markets.

Earlier this week, interest rates on 3-year Treasury notes turned higher than 5-year rates for the first time since the dawn of the previous US recession, back in 2007.

But since then, it has persistently declined, especially since the middle of last week, and now is at its narrowest since July 2007, on the eve of a steep recession.

Italian bonds extended their rally, with two-year yields falling 10 bps to 4 1/2-month lows after a cabinet official raised hopes that the government could cut almost four billion euros from its 2019 budget plans. Late in the day, the two-year yield also dropped below the five-year's, with the gap at negative 0.5 basis point heading into the evening. Karl W. Smith suggests the market is pricing in lower Fed rates in the future, either to end a recession or to prevent one.

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