Bond investors are locking horns over whether the inversion of yield curves really means the global economy is headed for recession.
For some, its predictive record speaks for itself. The last five times the yield on 10-year Treasuries dropped below those on 2-year securities, a contraction followed. For others, the bond market is now so distorted that an inversion isn't the kiss of death it used to be, though it may still become a self-fulfilling prophecy.
"The reality is the bond market smells trouble and equities are just starting to catch on," said Charles Diebel, head of fixed income at money manager Mediolanum. "Based on the yield curve, there's an 80% chance of the recession."
Determining whether or not a recession is coming by next year is crucial for fund managers looking at where to put their cash. The bond market has never been so expensive, with about $16 trillion of investment-grade debt now having negative yields — guaranteeing a loss for investors if held to maturity.
The flipping of the yield curve in the U.S. and the U.K. Wednesday triggered turmoil on Wall Street, with the S&P 500 Index slumping 2.9% and the Dow Jones industrial average plunging 800 points. President Donald Trump once again lashed out at the Federal Reserve for having interest rates too high, describing the yield curve as "CRAZY INVERTED."
The inverted yield curve looks set to be a global phenomenon, with Japan and other major Asian debt markets primed to mirror the moves in Treasuries. The Reserve Bank of Australia's Deputy Gov. Guy Debelle weighed into the debate Thursday, downplaying the inversion in the Treasury curve, saying he wasn't sure "how useful that signal is."
"If there were to be a recession, it's not clear at all what the policy response would be," Philipp Hildebrand, vice chairman at BlackRock Inc., told Bloomberg Television. "The problem of being out of ammunition adds an additional concern to markets and is an additional explanation why we're seeing these extreme movements in the yield curve and in interest rates generally."