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Recession, Blame It On US Bond Yield?

Author: Kushal Asthana/Wednesday, June 5, 2019/Categories: Exclusive

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Recession, Blame It On US Bond Yield?

US bond yields have been gradually falling over the past six months but the fall in the month of May-2019 has raised eyebrows across the globe. The U.S. 10-year Treasury bond yield fell to the lowest level in May since September 2016 as crude oil prices fell to their lowest level since March, while the U.S. dollar and gold rose. 10-Yr bond yields hit a high of 3.26 on October 9, 2018 and fell to a multi-year low of 2.12 on May 31, 2019. 

U.S. stocks fell sharply on May 31, while the S&P 500 closed with its biggest May drop since 2010. The latest tariff hike threat doled to Mexico by US President Donald Trump’s administration sent shockwaves down the global market. Trade war on multiple fronts could potentially lead the US to a recession. The US has announced imposition of a 5 per cent tariff from June 10 on Mexico, which could go up to 25 per cent until illegal immigration across Mexico border stops. The U.S. and China have imposed tariffs on each other’s imports since the start of 2018 which has undermanned business confidence not only in these two countries but in other parts of globe as well.

Crashing US bond yield is signaling that there is trouble ahead for the US economy. In recent weeks, Fed officials have highlighted the persistent weakness of inflation and the trade war as reasons for concern. Fed has already paused its rate hikes and may now start slashing rates from the end of the calendar year 2019.

The recent US economic data have also disappointed. Treasury yields have been moving lower on worries about the U.S. economy and trade wars. The bond market is indicating that rates will ultimately go down as it believes growth is going to be slower in the coming quarters.

Amidst this, the sharp fall in the crude oil prices has been an added advantage.  The CB consumer confidence data released last week came in at a strong 134.1 level, much better than the forecast. The prelim GDP q/q came in line albeit marginally lower than the previous print. In the short run US would be benefiting economically from the tariff it is imposing on many countries being one of the largest consumers of global goods so in all likelihood it would avoid the recession for the current calendar year at least!

The author is research analyst, Karvy-FX & Commodities

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