Dollar weak as U.S. Treasury yield curve inversion sparks recession fears

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Dollar weak as U.S. Treasury yield curve inversion sparks recession fears

The benchmark 10-year yield clung to an 11-basis-point margin over its two-year counterpart, although it was the smallest in over a decade. The curve between three-year and five-year notes inverted to a low of negative 1.2 basis points for the first time since 2007.

Gundlach told Reuters the Treasury yield curve from two- to five-year maturities is suggesting "total bond market disbelief in the Federal Reserve's prior plans to raise rates through 2019".

"Today is the flawless storm", said RJ Grant, head of trading at Keefe, Bruyette & Woods in NY.

The moves follow similar declines in US bank shares, which dropped 4.4 per cent on Tuesday. Fed Chairman Jerome Powell was scheduled to testify on Wednesday to a congressional Joint Economic Committee, but the hearing was postponed because of a national day of mourning for US President George H.W. Bush, who died on Friday.

Tuesday's markets chaos came a day after equities boomed on optimism that China and the US had temporarily called a tariff ceasefire to sort out their trade dispute.

They hovered close to two-month lows on Tuesday.

"As soon as investors digested the information from the discussions they focused on the uncertainties and lack of details", said Ryan Nauman, market strategist, Informa Financial Intelligence, Zephyr Cove, Nevada.

The Aussie, often viewed as a barometer of Chinese growth, had risen early in the session after China's Commerce Ministry said in a statement that a Chinese trade and economics delegation had held a successful meeting with the United States.

Let's take a look at how we got here. "But if not remember, I am a Tariff Man".

"There is a good reason why an inverted yield curve shows us a potential recession: it means credit is very tight, and expectations for growth and inflation are reduced", said Kathy Jones, chief of fixed income investments at Charles Schwab.

Gundlach said Fed policymakers will need to be especially careful in their choice of words when they meet on December 18-19 to deliver on their promised rate hike.

Williams said the USA central bank should expect to continue raising interest rates "over the next year or so" even while it pays close attention to possible risks highlighted by financial markets.

The dollar, which started the week on a weak footing as the apparent thaw in trade tensions between the USA and China cooled demand for the safe-haven currency, extended its fall as investors anxious about the inversion of the short end of the US yield curve in bond markets.

The pound was little changed at $1.2717 having touched a 17-month low of $1.2659, rattled by Brexit setbacks in parliament.

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.

Hong Kong's Hang Seng retreated 1.55 percent and the Shanghai Composite Index dipped 0.2 percent.

The threat of slowing economic activity also weighed on oil prices, but Brent futures trimmed losses to stand 0.4 percent lower at $61.8 per barrel.

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