WASHINGTON–For the first time in more than a decade, a section of the U.S. Treasuries yield curve inverted.
Earlier this week, the spread between three- and five-year yields fell to negative 1.4 basis points, dropping below zero for the first time since 2007, and the two- to five-year gap soon followed, according to analysis by Bloomberg.
“The two- to 10-year is more closely watched as a potential indicator of pending recessions,” Bloomberg reminded. “But Monday’s move could be the first signal that the market is putting the Federal Reserve on notice that the end of its tightening cycle is approaching.”
Bloomberg reported the yields on shorter-maturities fell on Tuesday during Asian hours, the spread between three-, five-year yields remained stable.
“Longer-maturity bonds rallied sharply, flattening the long-end of the yield curve. The U.S. 10-year slipped another three basis points to 2.94%, dropping below the 200-day moving average for the first time this year,” according to the analysis.
The Analysts’ Interpretations
Analysts have attributed the short-end underperformance to a number of factors, ranging from discussions between the U.S. and China to modestly higher expectations for Fed hikes in 2019. Either way, the five-year is faring better because investors anticipate the end of the central bank’s efforts to raise rates beyond next year, Bloomberg said.
“The outright inversion could be reflective of the market pricing in some cuts starting in 2020, which may be helping the 5-year tenor outperform slightly,” TD Securities rates strategist Gennadiy Goldberg told Bloomberg.
Bloomberg’s analysis added that curve flattening over the past two years has signaled investors’ concern that rising rates against a backdrop of slowing global growth could harm the U.S. economy. Inversion -- where yields at the short end rise above those at the long end -- has been a reliable indicator of recessions.
Just A Minute
However, some analysts told Bloomberg not too much should be read into the inversion earlier this week.
“I don’t think that that the 3s5s inversion alone will impact performance across asset class in the near term,” John Iborg, a portfolio manager at QS Investors LLC, told Bloomberg. “More flattening or an inversion in 2s10s and 10s30s will grab people’s attention more and will matter more to market participants and expected returns.”