Blink and you missed it: the U.S. yield curve inverted again

NEW YORK (Reuters) – A closely watched bond market phenomenon has again flashed yellow, but investors are loathe to give it much weight.

Yields on the 10-year Treasury note briefly fell below those of the 3-month bill early Tuesday for the first time since October, on concerns over the economic impact of the coronavirus. An inverted yield curve has historically been an indicator of looming recession as it tends to reflect worries over future growth among bond investors.

However, worries about the coronavirus have so far done little to shake the upbeat growth views many investors and analysts had going into 2020.

“The state of the U.S. economy seems to be steady as she goes,” said Michael Lorizio, senior fixed income trader at Manulife Asset Management. “To really forecast any chance of near-term recession I think I’d need to see more fundamental support from economic indicators, not just relying on the yield curve.”

Various portions of the Treasury yield curve inverted in 2019 for the first time in years, sparking concerns that a recession may be looming. Some of those worries faded after the Federal Reserve delivered three rate cuts and said it is unlikely to tighten monetary policy in the near future, buoying prices for stocks and boosting investor bullishness: a recent UBS Global Wealth Management survey of high-net worth investors showed that 94% expected positive returns in 2020, while a fund manager poll from Bank of America Merrill Lynch showed stock allocations at their highest level in 17 months.

Tuesday’s brief inversion came as investors rushed back into Treasuries and other haven assets, sending U.S. government bond prices higher and pushing down yields.

“You have the feeling of a fragile global economy that is relying on support from central banks and a situation where lots of risky assets appear…moderately overvalued,” said Thanos Bardas, global co-head investment grade fixed income at Neuberger Berman.

U.S. stock markets were on track to erase most of the previous day’s losses Tuesday after falling to a two-week low a day before. But investors remain concerned over how severe travel restrictions and other measures to contain the virus will impact China’s economy and ripple through the rest of the world. China’s economy—the world’s second largest—is already expected to expand at its slowest pace in three decades this year, a Reuters poll found earlier this month.

Some are also grappling with contradictory signals over growth in the United States. Lackluster business spending and a contracting manufacturing sector have been weak spots for the U.S. economy, while inflation has also remained low. Yet jobs growth has been solid, with the jobless rate at a 50-year low, and consumer spending strong.

At the same time, the U.S. curve has inverted before each recession in the past 50 years, offering a false signal just once in that time. Yet the inversion offers few clues on when a recession will actually hit.

The phenomenon may also be a less effective recession indicator these days, thanks to persistently low inflation expectations and unprecedented stimulus from the Fed and other global central banks.

“The market is pretty comfortable with what the Fed is going to do, and that is nothing,” said Gary Pollack, head of fixed-income trading, Deutsche Bank Private Wealth Management. “I’m in the camp still that indicator was a false one, but I could be wrong.”