Treasurys signals couldn’t have worse timing
Ken Odeluga December 4, 2018 4:09 PM
The Treasury yield curve is inverting as sentiment frays, partly because hopes on the U.S.-Sino trade agreement are evaporating.
Treasury yield curve inversion that’s throwing eye-catching shapes in closely watched rates elsewhere, is one of the reasons why a softer dollar isn’t easing risk aversion. The gap between two and 10-year Treasurys shrunk to the narrowest in around 11 years earlier. This lifts the curve created to within 13-14 basis points of ‘inversion’, the traditional harbinger of a coming U.S. recession. The gap between Germany’s two and 10-year bonds duly narrowed to the tightest in 17 months. Investors in Europe’s ‘growth engine’ are signalling that any future U.S. downturn, which consensus forecasts pin no sooner than late 2019, would eventually be mirrored on the continent.
All told, U.S. Treasurys are back in focus for the umpteenth time this year, though this time most of the interest is watching the downside. Fragile sentiment can be expected to over-react, whilst the emerging downtrend in yields also looks like an over-riding factor for the dollar. Additionally, the second testimony of Fed chair Powell to congress this year has been postponed due to commemorations of President H.W. Bush on Wednesday. With markets closed, attention on yield events, via futures, should be closer.
As the yield curve flattens, a break of its 10-year yield below the long-term trend marker (the 200-day moving average) for the first time since November 2017, is being closely watched. Traders will treat a close beneath the 200-DMA as an important juncture, increasing pressure on the dollar. In turn, this could propel symbiosis with yields further, as they both spiral downwards. Yield drama could subside later in the week, in the run up to the release of payrolls on Friday. As usual a number of unofficial curtain raisers, including ISM data, will precede payrolls. It is quite likely that these data will continue to paint a firm picture of U.S. hiring. This will bolster views that the U.S. economy remains robust. But after the 10-year yield definitively busted its cleanest rising line since September and as it now threatens another key indication of strength, broader markets are unlikely to escape continued tests this week.
StoneX Financial Ltd (trading as “City Index”) is an execution-only service provider. This material, whether or not it states any opinions, is for general information purposes only and it does not take into account your personal circumstances or objectives. This material has been prepared using the thoughts and opinions of the author and these may change. However, City Index does not plan to provide further updates to any material once published and it is not under any obligation to keep this material up to date. This material is short term in nature and may only relate to facts and circumstances existing at a specific time or day. Nothing in this material is (or should be considered to be) financial, investment, legal, tax or other advice and no reliance should be placed on it.
No opinion given in this material constitutes a recommendation by City Index or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person. The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although City Index is not specifically prevented from dealing before providing this material, City Index does not seek to take advantage of the material prior to its dissemination. This material is not intended for distribution to, or use by, any person in any country or jurisdiction where such distribution or use would be contrary to local law or regulation.