Interest Rate Outlook: Markets Stumble as Yield Curve Inverts

Co-authored by: Carter Bourassa

On Wednesday, August 14^th, 2019, the yield curve inverted when the 10-year Treasury note fell below the yield of the 2-year note. Equity markets dipped in reaction, with the three major indexes all suffering losses of more than 2.9%. Yield curve inversions are among the more reliable recession indicators; Credit Suisse reports that recessions follow, on average, 22 months after a yield curve inversion. The last such 2-10 inversion occurred in 2007. Adding to the stress in fixed income markets, the 30-year US bond yield dropped 15 bps to close the day at an all-time low of 2.02%, then fell further to 1.97% in early trading on Thursday and sits at 2.05% as of this morning. The inversion comes as the US-China trade dispute continues to escalate despite the White House delaying an estimated $300 billion in tariffs on Chinese-made electronics and toys.

Unrelenting Trade War

On Tuesday, August 13^th, 2019, President Trump announced the delay of tariffs on electronics including laptops, smartphones, and gaming consoles, pushing the implementation of the tariffs back to December 15^th from September 1^st. Apple, among other electronics manufacturers, rallied on the news, as the delay is intended to prevent a rise in electronics prices during the holiday shopping season. China was unmoved, and halted purchases of US agricultural goods while allowing the value of the Yuan to drop, a move the Trump administration deemed “currency manipulation.” In China’s view, the now-delayed 10% tariff constituted a breach of the agreement reached during the G-20 summit. Chinese officials indicated retaliation is imminent, but the next developments remain unclear.

Fed Rate Outlook

The FOMC convenes again on monetary policy on September 17-18 and the market-implied probability of an additional rate cut at the meeting has increased since the July 31 cut. As of writing, futures implied a 78% chance of a 25 bp cut and a 22% chance of a 50 bp cut.

Source: Bloomberg

Our research is for personal, non-commercial use only. You may not copy, distribute or modify content contained on this Website without prior written authorization from Capital Advisors Group. By viewing this Website and/or downloading its content, you agree to the Terms of Use.