30-Year Treasury Bonds Flash Economic Warning Signal

The bond market flashed yet another warning signal for investors on Wednesday that a downturn for the economy may be coming. Despite the S&P 500 hitting new all-time highs, the yield on 30-year U.S. Treasury bonds briefly dipped below the overnight fed funds rate, a signal that has preceded the past five U.S. recessions.

Bearish Signal

The 30-year Treasury yield dropped 0.032% on Wednesday to 2.476%, its lowest level since October of 2016. The chart below shows the last six times 30-year yields fell below the fed funds rate. Five out of those six instances were followed by a recession, with only one false signal back in 1986.

It’s official. US 30-year yield just inverted vs. the Fed funds rate!

Same warning ahead of the GFC, tech bust, Asian crisis, S&L crisis, and 1980’s double dip recessions.

The only false signal, 1986.

We now have the entire US Treasury curve below the Fed overnight rate. pic.twitter.com/P8sDJ5KVpO

— Otavio (Tavi) Costa (@TaviCosta) July 3, 2019

Despite the potential bearish signal, the Federal Reserve could be adjusting interest rates as soon as later this month, potentially reducing the fed funds rate significantly.

According to the CME Group FedWatch tool, the bond market is currently pricing in a 100% chance the Federal Reserve will cut interest rates by at least 0.25% this month and a 29.7% chance of a 0.5% cut.

Looking ahead to the end of the year, the bond market is pricing in a 92% chance rates will be at least 0.5% lower and a 60.2% chance they will finish the year lower by at least 0.75%.

Trump Applying Pressure

U.S. President Donald Trump has been increasingly critical of his Fed Chair Jerome Powell for refusing to cut interest rates up to this point. This week, Trump said he plans to nominate Christopher Waller and Judy Shelton as Fed governors, a move that experts say will help Trump apply pressure to Powell.

“The president has the right to appoint people to the Fed who support his view on monetary policy. That being said, this is one area in particular where the Senate has rebuffed the president for various reasons,” Gus Faucher, chief economist at PNC, told CNBC this week.

Despite the mixed economic signals, stock market investors don’t seem particularly concerned about the near term. The SPDR S&P 500 ETF Trust SPY traded higher by 0.8 percent on Wednesday and is now up 19.5% year to date.

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