Yield curve inverts further as US 30-year yield hits a record low

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Published Date 8/28/2019

More minor gains in the interest rate sector this morning as recession fears are increasing. The inversion of the 2/10 yield curve yesterday when with little outward concern as was the case two weeks ago when the inversion lasted 30 minutes and inverted by just 1 bp. The 2/10 inversion this morning is 5 bps where it ended yesterday. In early activity in the stock market, the indexes were lower at 9:00 am ET before the 9:30 open. World stocks slipped as a deepening inversion of the US bond yield curve a day earlier reignited worries over the possibility of a recession, sending investors towards perceived safe-haven assets from the Japanese yen to gold. The decline in interest rates adding increasing concern about a recession. At best the US growth is slowing, at worst headed for a recession, but if in the end there is a recession it isn't likely to be deep. The biggest worries for global investors is the increasing declines in global growth.

Weekly MBA mortgage apps declined last week, apps down 6.2% overall, purchase apps -4.0% while refinance apps slipped 8.0%. Applications recorded their biggest weekly drop in over four months as home borrowing costs posted their first broad increase in six weeks. Can't blame it on increasing mortgage rates as they have been virtually unchanged over the last three weeks, but with the expectations of lower interest rates ahead refinances are taking a break. Year-on-year, the purchase index is up only 2.0% in what is an unfavorable indication for underlying home sales.

At 9:30 am ET the DJIA opened -65. NASDAQ -31, S&P -8. 10 yr 1.45% -2 bps. MBS prices at 9:30 +5 bps from yesterday's close and +14 bps from 9:30 yesterday.

At 1:00 pm this afternoon Treasury will auction $41B of 5s; yesterday's 2 yr auction was OK and in line with the averages of the last 12 2 yr auctions.

More inflation worries (decline) coming from Germany; Germany's July Import Price Index decreased 0.2% m/m (expected -0.1%; last -1.4%), falling 2.1% yr/yr (expected -1.7%; last -2.0%). September GfK Consumer Climate remained at 9.7 (expected 9.6). Continued demand for the sovereign debt has pressured Germany's 10-yr bund yield to a fresh record low.

No matter the momentary debates over whether the US may be moving toward a recession or not; the decline in interest rates and the inversion of the 2/10 is pushing interest rates lower. Still bullish and the overbought condition that had persisted last week is lessening. The 10 yr in our technical outlook is likely to fall to 1.30% over the next month or two, but we warn there will be an increase in volatility driven by trade, recession outlooks, Brexit (British Prime Minister, Boris Johnson, has asked the Queen for a suspension of parliament until mid-October to prevent lawmakers from blocking a no-deal Brexit), any geopolitical news and what the Fed does with the Federal Funds rate. There are a few Fed officials and voters on the FOMC that are questioning the need to lower rates now. Yesterday former NY Fed Pres. Wm. Dudley, in an interview with Bloomberg, made the case that the Fed should not lower rates saying the continuing decline in the Federal Funds rates would allow Pres. Trump to continue pushing China for a trade deal that is roiling all global markets now.

Source: TBWS

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