Ryan Browne,Thomas Franck
The 10-year rate has reversed its 2018 climb in recent weeks, beset by falling oil prices, trade worries and volatile equity markets. The yield — used as a barometer for borrowing costs for both the public and private sectors — has dropped from highs above 3 percent as recently as Monday.
The yield on the 30-year Treasury bond dropped 4 basis points to 3.136 percent. The yield on the 2-year Treasury note sank 6 basis points to 2.752 percent. After the morning’s fall, the yield on the 10-year note later rebounded to near 2.87 percent in afternoon trading. Bond yields move inversely to prices.
“The tide is turning,” said Komal Sri-Kumar, president of Sri-Kumar Global Strategies. “The fact the 10-year yield is falling so sharply after the massive correction on Tuesday — we don’t even have a dead cat bounce — says there’s a lot more pain ahead for equities.”
Jitters in stock markets have also weighed on traders, leading to increased buying in typically safe haven assets like government bonds and gold.
The Dow Jones Industrial Average suffered an almost 800-point drop on Tuesday and was down nearly 700 points on Thursday as fears over a slowdown in economic growth and the U.S.-China trade war took hold. Tuesday was the index’s worst performance since Oct. 10.
The latest point of contention for fixed-income investors focuses on a phenomenon known as an inversion in the Treasury yield curve, which displays the yields on all U.S. paper maturities, ranging from 1-month bills to 30-year bonds. Yield curves typically slope upward, as an investor expects higher returns as they take on more risk for longer periods of time.
But recently, the spread between the 2-year and 10-year yields has narrowed, while the spread between the 3-year and 5-year yields inverted on Monday. That’s a point of nervousness for investors as yield inversions tend to precede economic downturn.
A recession wouldn’t be immediate, but economists in the past have warned that recessions have followed inversions a few months to two years later several times over many decades. The yield on the 2-year Treasury note fell significantly on Thursday a move that could alleviate some of those concerns.
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Canada’s arrest of Huawei Chief Financial Officer Meng Wanzhou over the alleged violation of U.S. sanctions against Iran has intensified worries around the spat between Washington and Beijing. Meng, the daughter of Huawei founder Ren Zhengfei, faces extradition to the U.S.
Elsewhere, investors are anticipating the Federal Reserve’s meeting on Dec. 18.-19. The U.S. central bank is widely expected to raise rates this month, although recent dovish commentary from Chairman Jerome Powell has led to queries about how many times it will hike rates next year.
Market participants will also be fixated on the Labor Department’s report on the employment situation on Friday. The government’s November jobs numbers will include an update on average hourly earnings, which can be used to see how fast wages are rising across the U.S. economy.
If wages are rising at a quick pace, Fed members may be more apt to continue to hike interest rates to try to stay ahead of inflation.
The difference between the 5-year Treasury inflation-protected securities, or TIPS, and the corresponding Treasurys hit 1.72 percentage points last Tuesday. That spread is a practical look at the market’s projection of where inflation is heading, and is down from highs over 2 percent in October.