U.S. Treasury curve inverts after PMI data misses estimates

March 22, 2019

By Kate Duguid

NEW YORK (Reuters) – The spread between three-month Treasury bills and 10-year note yields inverted on Friday for the first time since 2007 after U.S. manufacturing data missed estimates.

The three-month 10-year yield spread, the Federal Reserve’s preferred measure of the yield curve, narrowed to minus 0.56 basis points. An inverted yield curve is widely understood to be a leading indicator of recession.

The Markit Purchasing Managers’ Index report, which tracks activity in the U.S. manufacturing sector, on Friday disappointed investors, with the headline index down 0.5 percent to 52.5 versus the expected 53.6. Earlier, Germany reported that domestic manufacturing contracted further in March, driving the benchmark 10-year U.S. government bond below zero and adding to fears of a global slowdown in growth.

The soft data exacerbated a trend that began on Wednesday after the Fed issued a statement showing policymakers foresaw no further rate hikes for 2019 given the slowdown in the American economy.

“The reality is the market is now expecting lower rates on average over the next 10 years than we have currently. And it’s a combination both of a dovish Fed and also ongoing global growth concerns,” said Jon Hill, U.S. rates strategist at BMO Capital Markets.

“We’re clearly beginning to see green shoots of the end of this cycle. It’s now a question of timing and if the Fed’s dovish pivot will be sufficient to either delay or moderate the recession.”

(Reporting by Kate Duguid; Editing by Chizu Nomiyama and David Gregorio)

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