Published: Sun, August 18, 2019
Finance | By Kristine Clayton

Asian stocks lower after United States indexes tumble on recession fear

Asian stocks lower after United States indexes tumble on recession fear

Alarm bells are ringing louder in bond markets.

The yield on the 30-year Treasury bond was trading at 2.061% this morning, which was less than its record low of 2.9889% in 2016 just after the Brexit vote in the United Kingdom. According to economists at the US Federal Reserve: "Periods with an inverted yield curve are reliably followed by economic slowdowns and nearly always by a recession". It dipped on Wednesday by 0.2% to $1 512 per ounce but stayed near its recent $1 534 high.

The 10-year Treasury bond yield fell below 1.6% Wednesday, dropping just below the yield of the 2-year Treasury bond.

Investors consider yield inversions a reliable recession indicator, as such an inversion has always preceded each recession during the past 50 years.

But at times the relationship can flip, or invert, with shorter-term bonds yielding more than longer-term bonds.

The 3-month US Treasury already inverted versus the 10-year this spring. Mr Kelvin Tay, regional chief investment officer, UBS Global Wealth Management, noted: "Curve inversions may be a warning sign for recessions, but they're bad timing indicators for selling equities". A poll showed 43% of them see lower short-term rates in the next year, while just 9% saw higher long-term rates.

It compensates them for tying their money up for longer, when there is more risk that unexpected inflation could erode the value of their returns.

"That longer-end rates are rallying does suggest some lack of confidence that the central banks will actually be able to do anything about the slowing global growth momentum", he added. Bond yields fall in the opposite direction of prices.

It's believed that wary investors effectively bid down the price of the longer-term bonds as they look for a safe place to put their money. It's a reactionary market right now and probably will continue to be. Long-term yields are negative in Japan and Germany. The S&P 500 declined 2.93% after disappointing data from China and Germany increased the odds of a global slowdown.

"US-China trade tensions have metastasised into something more sinister by affecting global growth to such a large degree that bond markets are pricing-in a high probability of a worldwide recession", warned Stephen Innes, managing partner at VM Markets.

"This latest move on the long end of the USA curve is sending the Fed a clear message: the notion of a slow, methodical "mid-cycle adjustment" is very much in question, and at the same time so is the efficacy of lower rates to solve the issues at hand", said Gregory Faranello, head of US rates at AmeriVet Securities in NY. Concerns held by many (though by no means all) businesses and investors about the possibility of a no-deal Brexit are a UK-specific issue that may be contributing.

"This is a track record any economist would be proud of", Loyola Marymount economics professor Sung Won Sohn told CNBC.

"In our estimation, there would need to be a clear signal of a permanent cessation of trade hostilities between Washington and Beijing to turn around risk and business sentiment", he added. But when investors begin to worry about a market slowdown, the yield curve slopes downward, causing the curve to flatten or invert. (Remember that the start of a recession, which essentially means a temporarily shrinking economy, also doesn't necessarily overlap exactly with a stock market crash). "We expect foreign demand, however, will likely keep a lid on rates", he said. So the inversion shouldn't be a huge surprise. The same could also be said about the tech-heavy Nasdaq Composite.

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