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Stuart Canning, research analyst at M&G Investments, has said the temporary yield curve inversion which saw three-year Treasury yields lower than two-year notes is a signal that interest rates in the U.S. may need to come down in the near-term. The spread between the 10-year yield over its 2-year counterpart also shrank to the smallest since the start of the financial crisis in January 2008, signaling to some investors an approaching USA economic slowdown.

The yield curve inverted between the 2- and 10-year yield before the recessions of 1981, 1991, 2000 and 2008.

Yield curve inversions are seen generally as precursors of a recession.

On Monday, the difference between the two-year and 10-year Treasury yields dropped to just 0.15 percent, its lowest level since prior to the last USA recession. US financial shares, which are particularly sensitive to bond market swings, dropped 4.4 percent.

The MSCI's all-country index shed 0.5 percent.

In an "economic letter" published by the San Francisco office of the U.S. Federal Reserve (Fed), Michael D. Bauer and Thomas M. Mertens summarize the implications of an inversion succinctly: "Every U.S. recession in the past 60 years was preceded by a negative term spread, that is, an inverted yield curve". Shanghai markets fell 0.6 per cent, their losses limited by Chinese officials expressing confidence that a trade deal would be clinched on time.

Australian stocks lost 1 percent, pressured by global losses.

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Concerns about slowing US growth have accelerated the flattening of the yield curve, a phenomenon in which longer-dated debt yields fall faster than their shorter-dated counterparts.

"The US economy is likely to be able to withstand another rate hike or two, therefore the flattening of the Treasury curve looks a little over done". The 10-year Treasury note yield fell about 6 basis points to 2.498% Tuesday, its lowest since September 13, while the spread between 2-and 10-year notes dropped to 0.14%, the flattest level since June 2007, setting the tone for a possible inversion of spreads in the future. "That said, it is true that the economic outlook is murkier than before", said Masahiro Ichikawa, senior strategist at Sumitomo Mitsui Asset Management.

Recessionary pressures could be exacerbated if fears surrounding the US-China trade war are resumed following a 90-day truce, agreed to at the G20 summit in Argentina last week.

If that inversion happens, investors should prepare for a potential USA recession as soon as mid-2019. USA gold futures were also down 0.4 percent at $1,241.55 an ounce.

The dollar sagged in the wake of falling Treasury yields, with its index against a basket of six major currencies briefly stooping to a near two-week low of 96.379 overnight before edging back towards 97.00.

The pound rose off 17-month lows of $1.2659 hit on Tuesday to around $1.2751, up 0.3 percent on the day, amid creeping optimism that Britain could opt to stay in the European Union after all.

The threat of slowing economic activity also weighed on oil prices.


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