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The bond market is once more worried about a recession

Damian Wood
  • January 30th, 10:07
  • The US bond market on Tuesday sent a signal of a downturn.
  • 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.
  • According to DataTrek Research co-founder Nicholas Colas, the bond market signal is not the only problem policymakers need to deal with. The soaring spreads of speculative-grade corporate debt vis-à-vis state bonds is also a matter of concern to the Fed.

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.

About the author

Damian Wood
Damian Wood
As an experienced trader, I work for myself managing my own small portfolio and also contributing on several investment news sites. I mix my passion for the industry and journalism to bring my readers informative and trustworthy articles.

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