Global trend of falling bond yields sparks recession fears

16 Aug 19

US bond yields have fallen below 2% for the first time in history, producing an ‘inverted yield curve’, which can often signal a recession.

The movements in the US yesterday have lead to eurozone and Asian government bond yields moving into a worse position.

Bond prices move in the opposite direction to yields and so as investment increases, the price jumps and yields fall.

Investors may look to invest in bonds as a safe option at a time of economic uncertainty, and this can be used to forecast a potential recession.

Reuters reported that the US bond curve has inverted before every recession in the past 50 years and only once has it been a ‘red herring’.

But Andrea Iannelli, investment director at Fidelity International, said the effects won’t be felt immediately.

“Yes the inversion in the past has coincided with a recession in the following 18-24 months [but] we’re not talking about tomorrow.

“We have seen stocks trading very poorly as a result of the yield curve inversion, so that will be flashing some additional warning lights for the Fed [US federal reserve] that they have to do more.”

Iannelli was referring to potential pressure for the US Federal Reserve to cut interest rates. One of those putting pressure on the Federal Reserve was US president Donald Trump who claimed the central bank of the US was “holding back” the US economy.

The US treasury bond yield dropped to as low as 1.916% - its lowest level on record.

The German bond yield curve is not yet inverted but is at its flattest since 2008. The UK bond yield curve was inverted as of Wednesday.

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