US yield curve to invert in 2019: Reuters poll
▶ Economy expected to slow as tax cut stimulus fades
The US Treasury yield curve will invert next year, possibly within the next six months, much earlier than forecast just three months ago, with a recession to follow as soon as a year after that, a Reuters poll showed on Thursday.
Those expectations come on the heels of a deep sell-off in global stocks and the flattening of the US yield curve, with the gap between longer-dated and shorter-dated yields narrowing to its smallest in more than a decade.
Some maturities on the curve, notably yields on 2- to 5-year notes, have already flipped. An inversion between 2- and 10-year yields is a closely watched signal that has preceded almost all the American recessions of the past half century.
The US economy, currently in its second-longest expansion on record, has been juiced late in the cycle by the Trump administration’s tax cuts, and is expected to slow sharply by the end of next year as that stimulus fades.
That is expected to leave a budget gap of over $1 trillion that will need to be funded by the issuance of more Treasuries, which currently consists mostly of shorter-term maturities. Combined with policy tightening, that would push yields on those bonds higher.
“We are going to experience or will get closer to yield inversion by the middle of next year or maybe even a little bit earlier,” said Elwin de Groot, head of macro strategy at Rabobank.
“We already see growth slowing down next year and further in 2020. We are not yet forecasting a recession in the US, but the risks have clearly increased and that is going to be reflected in the shape of the yield curve.”
The Federal Reserve has raised interest rates three times this year and a total of eight times since the start of its tightening cycle, bringing its overnight benchmark lending rate to a range of 2.00 percent to 2.25 percent. Fed funds futures are pricing in one more rate rise next year after a widely expected hike at the central bank’s policy meeting next week.