The bond market is sending a clear signal to investors, according to one analyst.
On Wednesday, yields on 20-year Japan government bonds hit negatively territory for the first time ever. Yields on the 10-year Japan government bonds first turned negative back on Feb. 9 and have remained below zero since February 24.
"We"ve got risk aversion and a sign that maybe markets are starting to price in a recession," said Craig Erlam, senior market analyst at Oanda, based in London. "Whenever we see the yield curve flatten like we are seeing right now, that usually signals a market that"s anticipating a recession and further monetary stimulus from the central banks."
Erlam said there"s a "good" chance of a recession in the next year, particularly in the UK, citing a growing number of global risks, including Brexit. He said a UK recession could have negative implications for global trade, which may trigger recessions elsewhere.
Meanwhile, yields on the U.S. benchmark 10-year Treasury closed at 1.375% on Tuesday, a record low. Erlam said these yields are likely to fall further, but still remain well above their European and Japanese counterparts.
"I think the markets have now priced out a rate hike from the Federal Reserve this year," he said, adding that he"ll be watching how yields respond to Wednesday"s minutes of the Fed"s June meeting, which may give additional insight into the central bank"s thinking and reaction to the dismal May jobs report, which is one of the reasons why the Fed left rates unchanged in June.
The economy added 38,000 jobs in May, missing estimates of 158,000. The June jobs report is released on Friday and economists expect nonfarm payrolls to rise by 180,000.