NEW YORK- 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 US 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 percent 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 US government bond prices higher and pushing down yields.
The very front of the curve remained kinked, with bills yielding more than shorter-dated notes like 2-year, 3-year, and 5-year maturities. However, those relationships are not as closely monitored as economic bellwethers.
“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.
US 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. – Reuters
