Skip to main content

The yield spread between 2-year and 10-year Treasury notes narrowed to the lowest level in more than a decade Tuesday, placing one of the most reliable recession indicators near the level that often signals a sharp economic slowdown.

The difference between 2-year and 10-year yields fell to 3 basis points in early Tuesday trading, the lowest since June 2007, after data from the Commerce Department showed July core consumer prices rose by a faster-than-expected 2.2% from last year, accelerating past 2% for the seventeenth consecutive month.  The data suggests importers paying tariffs on China-made goods -- $6 billion alone in June and $28.8 for the nine months of the government's fiscal year -- are starting to pass those costs onto customers.

President Donald Trump, however, took to Twitter Tuesday to suggest that there is "no inflation" while insisting the "tens of billions" the government is collecting is being paid by the Chinese government.

China's currency has fallen around 4.9% against the dollar since early May, when trade talks between the two sides collapsed and Trump applied enhanced tariffs on China imports. That slide, however, is around half of the 8.4% decline in the value of the pound, which fell to a multi-year low of 1.2071 in early New York trading.

The so-called yield curve, a term for the difference between interest rates of different maturities in the bond market, hads "flattened" throughout the spring and summer months as two-year yields fall in anticipation of interest rate cuts from the Federal Reserve and 10-year yields following suit amid questions over mid-term growth prospects and huge inflows of foreign investment dollars as trillions in fixed income debt outside of the U.S. falls deeper into negative rate territory. 

The flattening has 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, according to multiple Fed studies.

In Germany,Bund yields, which are a proxy for risk-free interest rates in the Eurozone and a key metric for global investor sentiment, have traded with a negative yield for several weeks, with 10-year paper at an all-time low of -0.613% and 30-year bonds trading at -0.135%.

Negative yields in such a large market -- BIS data suggests all German-issued debt was pegged at €3.6 trillion last year -- inevitably push investors to search for higher returns in other markets. JPMorgan, meanwhile, estimates that more than $13 trillion in global debt now trades with a negative yield. 

Bank of America Merrill Lynch said Tuesday that its benchmark Global Fund Managers' survey suggests bond allocation rose 12 percentage points this month to a net underweight of 22%, the highest since 2011. Last week, it's Flow Show report said $12.4 billion has left equity market portfolios last week, and with negative yields in Germany and Japan, and near-zero rates in other developed markets, it's a safe bet to assume much of that cash has found its way into Treasuries.