Dollar pressured by falling U.S. yields; recession fears

Marco Green
December 7, 2018

On Monday, the difference between the two-year and 10-year Treasury yields dropped to just 0.15 percent, its lowest level since prior to the last USA recession.

The yield curve inverted between the 2- and 10-year yield before the recessions of 1981, 1991, 2000 and 2008.

"Today is the ideal storm", said RJ Grant, head of trading at Keefe, Bruyette & Woods in NY.

Regardless of other possible reasons, "it is mainly indicative of worries about how long growth in the US can remain so strong". In recent weeks expectations about what the Fed will do next year have eroded, with investors now anticipating policymakers will raise rates only one time next year, and, coupled with an expected increase in December, pause with a federal funds rate of around 2.7 percent.

Japan's Nikkei dropped 0.8 percent and South Korea's KOSPI shed 0.5 percent.

Recessionary pressures could be exacerbated if fears surrounding the US-China trade war are resumed following a 90-day truce, agreed at the G20 in Argentina last week.

That's overstating the risk, but it does indicate that investors are pessimistic about longer term economic growth and prefer to keep their money in short-term investments.

"As soon as investors digested the information from the discussions they focused on the uncertainties and lack of details", said Ryan Nauman, market strategist, Informa Financial Intelligence, Zephyr Cove, Nevada.

Trump threatened on Tuesday to place "major tariffs" on Chinese goods imported into the United States if his administration is unable to reach an effective trade deal with Beijing.

"If it is, we will get it done", Trump wrote in a Twitter post. "But if not remember, I am a Tariff Man".

The inverted yield curve persists for a second day. The Fed may try to reassure markets that the economy is doing well and that it is not anxious by continuing with their planned rate hike of a 25 basis points or they may single a delay of the hike. A separate spread between 3-month and 10-year Treasury securities, considered by some as a better recession predictor, was also falling, though at just around 0.5 percentage point it remained comfortably in positive territory.

The comments came after those from Fed chair Jerome Powell last week, which lifted stocks as they were interpreted as suggesting a less aggressive path of rate hikes.

The dollar, which started the week on a weak footing as the apparent thaw in trade tensions between the US and China cooled demand for the safe-haven currency, extended its fall as investors anxious about the inversion of the short end of the USA yield curve in bond markets.

The pound rose off 17-month lows of $1.2659 GBP=D3 hit on Tuesday to around $1.2780, up 0.3 percent on the day, amid creeping optimism that Britain could opt to stay in the European Union after all.

USA crude futures were down 1.7 percent at US$52.35 per barrel and Brent shed 1.75 percent to US$61.00 per barrel. The longest-duration Treasury bond (meaning fixed-interest debt backed by the USA government) is 30 years.

Other reports by Click Lancashire

Discuss This Article

FOLLOW OUR NEWSPAPER