Treasury yield-curve inversion deepens

A widely-watched gauge of the Treasury yield curve inverted further on Tuesday as the 10-year note yield plunged to its lowest level since July 2016.

Bond market participants said they were increasingly worried about the economic outlook in the face of an escalating U.S.-China trade war.

What are Treasurys doing?

The 10-year Treasury note yield slipped 5.2 basis points to 1.493%, its lowest since July 2016. The benchmark maturity is around 17 basis points away from its all-time low of 1.32%.

The 2-year note rate was down 2.5 basis points to 1.533%, while the 30-year bond yield  slumped 6.6 basis points to 1.975%, an all-time low.

The spread between the 2-year note and the 10-year note stood at negative 4 basis points, Tradeweb data show.

The yield curve’s slope is usually positive as investors demand more compensation to own long-term debt against inflationary pressures or monetary policy uncertainty. An inversion of the yield curve, or a negative yield spread, thus points to growing worries about the health of the economy and is seen as a usually reliable indicator of a coming recession.

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What’s driving markets?

On the international trade front, President Donald Trump said on Monday that Beijing had called U.S. trade negotiators in a plea to restart talks, but Chinese foreign ministry spokesperson he was not aware of high-level phone calls made to U.S. officials. Higher import tariffs on both U.S. and Chinese goods are due to go into effect from September 1 with some delayed until later this year.

Trump’s about-turn Monday from his harsh trade rhetoric against China last week helped soothe investor sentiment this week, buoying risk assets and pulling bond yields higher briefly.

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The U.S. Treasury Department sold $40 billion of 2-year notes, as investors continued to buy up government paper even after this year’s rally has led some to complain they are trading at historically expensive values. This was the first auction for the 2-year note to sell at a higher yield than the benchmark 10-year note since the financial crisis.

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In economic data Tuesday, the showed home prices rising nationally at 2.1% in June, down from a 2.4% gain the previous month, while

More evidence of a global economic slowdown was also seen in as weaker exports dragged on growth.

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What did market participants’ say?

“This yield curve inversion is ‘flashing red’ and would be really surprised if we do not get a recession in 12 months’ time,” Tom di Galoma, managing director of Treasurys trading at Seaport Global Securities, said in emailed comments.

“Bond investors are buying out at the end of the curve as they believe lower interest rates are upon us and will be for a long time. There is a prolonged trade battle with China, unrest in Hong Kong, and continued slow of global growth, all of which is creating the mind-set for lower rates,” said di Galoma.

What else is on investors’ radar?

Prices for Italian government bonds surged after signs that coalition talks between the antiestablishment 5 Star Movement and the center-left Democratic Party were making headway, soothing fears of a potential snap election. Democratic Party Senate leader talks between the 5-Star and the center-left party had made progress.

The 10-year Italian government bond yield tumbled 16.9 basis points to 1.150%.

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