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Short-term treasury yields once again overshadowed long-term note yields on Thursday as investors in the bond market fear the Federal Reserve will not be able to cut interest rates sufficiently to protect the US economy from slowing down. global growth and the rise of trade disputes with China.
For the third time this month, two-year US Treasury yields outperformed the 10-year index. Another part of the yield curve – reflecting the difference between yields on three- and ten-year Treasury bonds – slipped deeper into negative territory, approaching nearly 40 basis points.
The reversal of the yield curve – which took place before every US recession of the past 50 years – came when Fed officials met in Jackson Hole, Wyoming, for their annual meeting, which was held in Washington DC. Ended with a speech by Jay Powell, chairman of the Fed.
Esther George, president of the Kansas City Fed, and Patrick Harker, president of the Philadelphia Fed, commented less dubiously that it was unlikely that the central bank would meet market expectations and cut rates. Interest at around 100bps by the end of 2020. Futures prices currently indicate.
In televised interviews, Mrs. George and Mr. Harker stated that they saw no reason to further reduce interest rates beyond the quarter-point reduction of the Fed in July.
Mrs. George, who voted against the rate cut, said to Bloomberg, "When I see where the economy is, the time has not come yet, I'm not ready to provide more than housing to the economy without seeing any prospects suggesting that the economy is starting to weaken. "Mr. Harker said on CNBC that it was not necessary to take additional measures.
John Briggs, head of strategy for the Americas at NatWest Markets, said: "They are almost waiting for it to be too late, and that's what the curve reflects."
Tom di Galoma, managing director of Seaport Global Holdings, said the approach taken by the Fed was returning to "dragging on its feet" at a time when, in nearly 30 years "Has never seen the market seek on the part of the Fed significantly reduce its spending"
"If you look at the situation as a whole, the fact that they should do more than less" has some credibility, "added Mr. di Galoma, citing evidence that a reversed yield curve is a precursor to the recession in 12-15 months now.
US mill activity declined this month for the first time since September 2009, according to the IHS Markit US Purchasing Managers Index. On the inflation front, the 10-year break-even point, derived from the price of government securities protected against inflation, hit its lowest level in three years at 1.54%.
Given the economic context and the escalation of the US-China trade war, Mr. di Galoma said he expected a "major change" in Jackson Hole, in which Mr. Powell "would change his tone. to adopt a more dovish tone ".
Subadra Rajappa, head of US rate strategy at Societe Generale, said that she was watching whether Mr. Powell would continue to qualify any future easing as a "mid-cycle adjustment" as he had done in July, disappointing investors who were anticipating a longer easing cycle.
Formulating the central bank's monetary policy in the same way would "indicate that they will not be aggressive or reduce much. . . that would be at odds with what the market is about prices, "she said.
Seema Shah, a strategist at Principal Global Investors, said Powell "must get the message out" to Jackson Hole, given the market's expectations and its botched communication efforts in the past.
"We are coming to a point where the feeling is so carefully balanced that you need a breaker," she added. "If the Fed does not point to further relaxation coming, the markets will think that the Fed is no longer there to support them and this will contribute to a downward spiral."
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