The Treasury yield curve’s flattening indicates the U.S. is on the cusp of a recession similar to what afflicted Japan in the late 1990s, according to MKM Partners LLC’s Michael Darda.
The extra yield investors get to hold U.S. 10-year notes instead of two-year debt shrank today to 1.91 percentage points, the narrowest since April 2009. Japan slipped into a recession during the second half of 1997, when the spread between its 10- and two-year government bonds collapsed below 1.75 percentage points, according to Darda, chief economist at the research and trading firm, during a radio interview on “Bloomberg Surveillance” with Tom Keene and Ken Prewitt.
“This Treasury market looks like Japan, and it is not a bullish signal in any way, and the stock market’s obviously confirming that,” said Darda, 37, based in Stamford, Connecticut. “At least for now this Treasury market is saying deflationary recession is the real risk.”
U.S. government debt yields are poised to converge with Japan’s for the first time in almost two decades. The extra yield investors get to hold two-year American notes instead of Japanese debt has shrunk to 0.04 percentage point, the narrowest since the spread contracted two days ago to a record low 0.03 percentage point, the lowest on a closing basis in data beginning in 1992.
Yields on U.S. 10-year notes fell today below 2 percent for the first time on the prospects of a slowing global economy, touching 1.97 percent. Two-year note yields were unchanged at 0.19 percent. Japan’s two-year yield slid to 0.15 percent, while its 10-year yield fell to 1 percent.
U.S. Inflation
Consumer prices excluding food and energy increased 0.2 percent last month, the lowest since April, and first-time jobless claims climbed last week the most in a month, the Labor Department reported.
The Philadelphia Fed’s general economic index indicated manufacturing in eastern Pennsylvania, southern New Jersey and Delaware unexpectedly contracted in August by the most in more than two years.
“Some people associate low and falling rates with easy money,” Darda said. “This collapse in Treasury yields, in my view, is signaling much weaker nominal growth expectations ahead.”
To contact the reporters for this story: Joe Ragazzo in New York at jragazzo@bloomberg.net; Tom Keene in New York at tkeene@bloomberg.net
To contact the editor responsible for this story: Dave Liedtka at dliedtka@bloomberg.net
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