The spread between the yields on 2-year and 10-year U.S. Treasury notes turned negative earlier this month for the first time since 2007. An inverted yield curve has occurred ahead of every U.S. recession in the past 50 years, sometimes leading by as much as 24 months.
“We have $15 trillion of negative-yielding assets around the world,” Keith Fitz-Gerald, chief investment strategist at the Baltimore-based Money Map Press, told FOX Business’ “Cavuto Coast to Coast.” “I think we simply have a supply and demand problem. Money is coming here because it’s the only place they can get paid to store it.”
Central banks in Europe, Japan and elsewhere have lowered rates to at or near zero in an effort to jumpstart their slowing economies, causing a large amount of their debt to have a negative yield, with buyers paying more than they will recoup. Investors in those countries, and around the world, are plowing money into U.S. Treasurys instead.
“I think that artificially depresses the yield curve and that the probability of recession is higher than it would otherwise appear,” Fitz-Gerald said. “I’m leery that this indicator is not what it used to be. It’s certainly something we want to watch, but I don’t think it’s the accurate harbinger of doom that everyone used to think it was.”
Deutsche Bank Securities Chief Economist Torsten Slok agrees.
The inversion in the two-year and 10-year yield curve isn’t necessarily signaling recession “because, most of the recent decline in 10-year rates is not because of the market changing its view on the economic outlook or what the Fed will do,” he wrote on Wednesday.
Many on Wall Street have been quick to point out that the U.S. economy appears to be strong. Gross domestic product growth slowed to 2.1 percent in the second quarter, but that’s still better than most of the world. Additionally, the U.S unemployment rate held at 3.7 percent in July, near a 50-year low.
“Though the U.S. economy may be slowing from last year’s pace, it is still growing,” said John Lynch, chief investment strategist at Boston-based LPL Financial.