U.S. Treasury bond yields slumped to multi-year lows Wednesday, sending Wall Street equity futures deeper into negative territory as investors worried that the U.S.-China trade dispute could trigger a global recession.
Benchmark 10-year Treasury note yields were marked 6 basis points lower on the session at 1.611%, the lowest in at least 3 years and just 30 basis points from its all-time low. Two year notes, meanwhile, traded at 1.553%, putting the yield differential at just 6 basis points, the lowest in 11 years. The spread between 3-month Treasury bills and 10-year note yields, meanwhile, was inverted by 37 basis points, the most since March 2007.
Data from Germany early Wednesday, which showed the steepest year-on-year decline in industrial production from Europe's biggest economy since 2009, offered further evidence that the ongoing U.S.-China trade spat is taking its toll around the world, a condition St. Louis Federal Reserve President James Bullard said Tuesday he expected would remain "for the quarters and years ahead."
"Taken together, recent developments have increased the odds, in our view, that a "mid-cycle adjustment" of the Fed Funds rate similar to the mid and late 1990s (when the Fed cut rates three times) may not suffice to stabilize growth, but that last Wednesday marked the beginning of the next major Fed easing cycle," said Joachim Fels of PIMCO. "To be sure, so far this is only a possibility rather than a probability. But if the Fed cuts rates all the way back down to zero and restarts quantitative easing, negative yields on U.S. Treasuries could swiftly change from theory to reality."
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The CME Group's FedWatch tool, which assigns rate change probability, is pricing in an 74.2% chance of a 25 basis point September cut, up from just 54.8% last week, and a 25.8% chance of a 50 basis point reduction, up from just 2.1% last week.
Safe-haven assets also were active again in overnight trading ahead of a $27 billion auction of new paper later today, while spot gold prices scaled a fresh six-year peak of $1,500.06 per ounce and December futures rising past $1,500 per ounce.
European stocks shot higher at the start of trading in Frankfurt, however, as the euro slipped to 1.1180 on hopes of fresh stimulus from Berlin, as well as the European Central Bank, following the German June industrial production data. Benchmark 10-year bund yields were also active, falling to a record low -0.601%, pulling some $14 trillion in global fixed income assets into negative yielding territory.
The so-called yield curve, a term for the difference between interest rates of different maturities in the bond market, had "flattened" throughout the past six weeks as the U.S.-China trade dispute deepened and factory output in the world's biggest economies fell to the lowest level since 2012.
The flattening had investors fretting over an an inversion of the yield curve, a condition where 2-year yields rise above 10-year yields and which has signaled nearly every U.S. recession for the past 60 years.
However, the potential curve inversion has always sat in contrast to the surging pace of economic growth, with third quarter GDP rising at a 3% clip and the Atlanta Fed's GDPNow forecasting tool suggesting a 1.9% pace for the three months ending in September.
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