Pray for the global economy. For much of the past year or so, investors and economists have anxiously watched the relentless shrinkage of the gap between short- and long-term U.S. bond yields to the narrowest levels since 2007. After all, an inversion — when long-term yields fall below short term ones — preceded each of the last seven recessions. But while everyone has been so focused on the U.S, they seemed to have missed the global yield-curve inversion.
Within the past two months, the yield on an ICE Bank of America index of government bonds due in seven to 10 years has fallen below the yield on an index of bonds due in one to three years for the first time since the first half of 2007. The strategists at JPMorgan Chase & Co. said they were seeing the same thing in indexes they manage. Although the U.S. economy is in solid shape, there have been signs of weakness in the euro zone, China and emerging markets over the past month. A Citigroup Inc. index shows that worldwide economic data is missing estimates by the most since 2013. And within the past few weeks, both the International Monetary Fund and the Organization for Economic Cooperation and Development said that although tax cuts and fiscal spending were boosting the U.S. economy now, those moves are increasing risks to the global economy by causing debt to rise and potentially stoking inflation and the dollar.
To be sure, no significant individual market has an inverted yield curve, and the gap between two- and 10-year U.S. yields is 37 basis points. The JPMorgan strategists said indexes show an inversion because of how they are composed. U.S. bonds have a much higher weighting in the one- to three-year bucket, or about 50 percent, than in the seven- to 10-year bucket, where it has a weight of only 25 percent. That is important because short-term yields are higher in the U.S. than in much of the rest of the world, and there are a lot more short-dated U.S. government bonds relative to longer-dated ones.
Still, who wants to bet against the track record of the yield curve?
Read the full Bloomberg article here