Recession Fears Grow as 10-Year/2-Year Yield Curve Flattens
(Kitco News) - Recession fears remain a consistent drag on financial markets and the threat has grown as the U.S. 10-year/2-year treasury yield curve inches closer to inverting.
Although investor sentiment has improved slightly after the U.S. government said it would ease some of its import tariffs with China, overnight the 2-year came to within one basis point of meeting the 10-year bond yield. The yield differential is at its lowest point since 2007.
Although parts of the yield curve have been inverted for months, investors pay particular close attention to the spread between 10-year and two-year bonds; an inversions of that part of the curve have preceded every recession over the past 50 years.
However, for some the long-awaited move is now just one factor within a much broader landscape.
Fixed income strategists at TD Securities, in a note published last week, placed a 55% chance that the U.S. falls into a recession.
“This supports our Fed call of 50bp of more eases in 2019 (September and October), followed by an additional 75bp of easing in 2020,” the analysts said.
Daniel Ghali, commodities strategist at TD Securities, added that because of the growing fears of a recession, an inverted yield curve is not going to add much to the overall picture. He added that he doesn’t expect an inverted yield curve to have much impact on gold prices.
“When we finally get an inversion of the yield curve there will be a bunch of headlines and that will be bullish for gold, but I don’t see that driving prices to new highs,” he said.
Colin Cieszynski, chief market strategist at SIA Wealth Management, said that it is not a major surprise to see two-year interest rates on the cusp of pushing above 10-year yields.
“I think this inversion of the yield curve has been priced in to some extent and I don’t see it having a big impact on gold,” he said. “It’s just another signal that adds to all the other signals flashing out there.”
Bill Baruch, president of Blue Line Futures, said that while the inversion will not directly push gold prices higher, it continues to highlight the positive environment for the yellow metal.
“The flattening yield curve is what has been driving gold prices higher. It has really lifted the ceiling for gold,” he said. “The yield curve is moving because there are major fears of a recession.
Baruch added that that although gold prices appear to be facing some strong resistance he remains bullish on the precious metal as prices have managed to hold critical initial support above $1,480 an ounce.
Although an inverted yield curve won’t drive gold prices to fresh highs, Baruch said that it will still be the significant force in the marketplace.
“The landscape that is fueling this drive in gold needs to continue to deteriorate and that is what an inversion will signal,” he said.