Alarm bells are ringing louder by the day in bond markets around the world, signaling anxiety about economic prospects is flourishing amid ever-worsening trade tensions.
In the U.S., the yield on the Treasury 3-month bill on Friday exceeded the yield on the 10-year note by a margin last seen in 2007, sounding the loudest recession warning since just before the financial crisis.
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Germany’s 10-year rates plunged to a new record low well below zero, cutting their premium over two-year securities to the lowest level since 2015. Britain’s yield curve is around its flattest level since the global crisis more than a decade ago, and Canada’s is seeing 2007 levels of inversion.
“As much as you want to say that is it overdone, it is appropriate to the news flow markets have had to digest,” said Richard Kelly, head of global strategy at Toronto-Dominion Bank.
Already on edge amid a softening economic backdrop and hardening divisions between China and the U.S., global markets were further rattled Friday by President Donald Trump’s latest salvo against Mexico. His vow to impose tariffs on Mexican goods sent traders scurrying for havens and dented equities.
Traders are also on alert for other potential geopolitical risks, from Iran to North Korea, and are keeping a keen eye out to see if persistently sub-target inflation eventually spurs a shift toward more dovish policy from the Federal Reserve. There’s so much conviction the Fed will be forced to cut interest rates that the market is pricing in at least three quarter-point reductions by the end of 2020.
For Kacper Brzezniak, money manager at Allianz Global Investors, the extreme curve flattening signals that the global economic cycle may have peaked and central banks will have to move back into easing mode, while Rabobank International rates strategist Matthew Cairns said the bid for havens that’s taking place is “well justified.”
