The S&P 500 took a hard dive on Friday after the bond market finally gave investors the bearish signal they have been fearing for months.
For the first time since 2007, the yield on the 10-year Treasury note fell below the yield on 3-month Treasury bills briefly on Friday morning. Yield curve inversion has historically been a reliable leading indicator of an economic recession.
What To Know
According to the San Francisco Fed, each of the nine U.S. recessions that have occurred since 1955 came between six months and 24 months after a an inversion in the yield curve of two-year and 10-year Treasury yields. Although this particular yield curve remained positive Friday, the spread between two-year and 10-year Treasuries dropped to just 10 basis points.
The curve inversion came just one day after the Federal Reserve indicated that no more interest rate hikes would be coming in 2019. The Fed also followed China and Europe in 2019 cutting its economic growth outlook.
Why It's Important
The late-week action has pushed 10-year Treasury yields to just 2.47 percent. This level is important because the Fed funds target rate is currently 2.25 percent to 2.50 percent, with the effective rate at 2.41 percent. According to CME Group, the chances of a Federal Reserve rate cut in 2019 have risen from 10.9 percent one month ago to 57.8 percent on Friday.
On Thursday, U.S. President Donald Trump once again blamed Fed Chair Jerome Powell for choosing to proceed with a December 2018 rate hike.
"If we didn’t have somebody that would raise interest rates and do quantitative tightening, we would have been at over 4 instead of a 3.1,” Trump said about U.S. GDP growth last year.
Trump’s critics have blamed slowing U.S. economic growth on the ongoing trade war with China and the recent government shutdown.
The U.S. isn’t the only major country suffering from falling yields. Ten-year yields in New Zealand, Japan and Germany all fell to multi-year lows on Friday. German yields dropped below zero for the first time since 2016.
What’s Next
All investor eyes will be on the spread between two-year and 10-year U.S. Treasuries into Friday’s close.
The SPDR S&P 500 ETF Trust (NYSE:SPY) traded lower by 1.6 percent in mid-day trading. The iShares Barclays 20+ Yr Treas.Bond (NASDAQ:TLT) was up 1.6 percent.
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