The bond market is once more worried about a recession

With last year’s recession out of the way, it seems the bond
market is at it again. Experts say the market is sending another downturn
signal.

Just like in 2019, the spread between different bonds or the yield
curves is starting to get tight anew, after yesterday’s five basis points difference
between the three-month and the 10-year Treasury bonds.

Whenever the three-month Treasuries top the 10-year benchmark, that
is described as an inverted yield curve, and since 1950, it has been known to
be a sign of a soon-to-occur recession.

The inverted curve, which usually signals a likely recession in twelve
or fewer months last occurred in May 2019 but then reverted in October, alleviating
worries of a possible downturn.
And on Tuesday morning, the curve briefly inverted, sending fears among investors
who are already grappling with the effects of the Coronavirus on stocks.

The US Fed is charged with keeping track of the relationship between
the Treasuries and evaluating probabilities thereof. By the close of last year,
the chance of an occurrence of a recession stood at 23.6%. That is still a high
probability yet a relief from an earlier 40% chance when the curve inverted.

Yesterday’s meeting of the Fed may have to contend with a slowing
economy if indications by the bond markets turn out to be right.

DataTrek Research co-founder Nicholas Colas on Wednesday
said in a note: “While the Fed may want to portray its 2020 rate policy as
stable, markets are signalling that their bias should be to further easing.”

The Fed officials are not expected to make any changes during the
week even after the meeting. The regulator’s chairman Jerome Powell said it
would take “material reassessment” of the ongoing events to get further
easing from the central bank following 2019’s readjustments that led to three
consecutive interest rate cuts.

But according to Colas, soaring spreads of speculative-grade
corporate debt vis-à-vis state bonds is also a matter of concern to the
Fed. Additionally, the stocks have also rallied since the Fed expanded their
balance sheet last year October, piling pressure on regulators to maintain an accommodative
policy.

“There’s not much the Federal Reserve can say; they are in the
same boat as investors when it comes to evaluating what will happen next,”
Cole added.