The bond market has officially turned off the recession alert, pointing to the potential for stronger growth.
Since the summer, as fears of a global economic meltdown gripped the bond market, conditions in the Treasury market and the economy had changed. So has the prospect of trade talks between the US and China, and as a result, bond yields, which move at the opposite price, will rise.
Now that the Fed has cut interest rates three times, short-term returns, like 2-years, do not increase as quickly as long-term yields. The 2-year high was up 1[ads1]0 basis points on Thursday, but the 10-year return fell higher by around 14 basis points on reports that the tariff rates could be dropped. The 10-year return rose as high as 1.97% in its largest engagement since the 2016 presidential election, but it was at 1,928% at the end of the day.
The 10-year-old was also at his highest level since August 1, the day Trump tweeted that he could impose new tariffs on China, a negative event for the markets. It was also the day after the Fed cut interest rates by a quarter, the first of three cuts.
Short-term returns are no longer higher than long-term rates, such as the 10-year benchmark. This phenomenon is called a reverse interest rate curve, and it is a signal in the financial markets that a recession may be on the horizon. This sentiment peaked at the end of August and September.
Now the curve has become stronger, and the closely monitored 3-month to 10-year spread is at its highest since last January, a month after the Fed's final rate hike. The three-month Treasury yield was 36 basis points below its 10-year return on Thursday, after falling to as low as negative 54 basis points in August.
"One way to interpret the flat or reverse yield curve is a potential indicator of a monetary policy error. We see the likelihood of it being significantly reduced. You got the Fed cut three times despite a tight labor market and a close stock price, "said Jon Hill, senior rate strategist at BMO. "Economic momentum may have hit a trough. The concern for the decline in production, the global synchronized recession, seems to have been blown."
Strategists say that returns are in a trend, largely due to progress in the trade talks. But they do not see decades moving well above 2% in the short term, as markets look at trade trends and financial data. Hill said the next high watermark to look at in the 10-year year would be 2.06, the high on August 1.
Greg Faranello, Amerivet Securities chief of US prices, sees that returns continue to move higher.
for the yield curve to steal must come from headwinds that soften on the global macro side, and the long end that releases more than the short end. The dynamics have clearly adjusted for a trade the market is not really prepared for, "he said, adding the 10-year-old can rise above 2% in the near future.
" Ultimately, you have to choose. 2.25% is a level I would say: & # 39; What do valuations look like? & # 39; But right now this is going to feed, "he said.
At the historical level, the curve is not so steep, but the 3-month-10-year spread has moved by more than 90 basis points, from the largest inversion point at the end of August.
"It turns out that when you cut short rates of 75 basis points, you can sweep that curve by 93 basis points. In general, it looks more and more like the Fed can achieve its soft landing. It is by no means a final deal. This is still based on the completion of the trade and continued positive financial data, "Hill said.
CNBC's Fred Imbert contributed to this story