10-Year Treasury Yield Plunges To Lowest In Nearly 3 Years: Why It Matters

The markets are in turmoil amid escalating trade tensions between the U.S. and China.

Since the start of August, the equity market has retreated in all but one session, with analysts sounding out a possible correction —which would mean a pullback of at least 10% from a recent high.

Flight To Safety Pulls Yield Lower

As traders scramble for cover, they seek out safe haven assets such as bonds, pushing their prices higher. As bond prices and yield share an inverse relationship, the yields are tumbling.

The yield on the benchmark U.S. 10-year Treasury note fell to a low of 1.595% Wednesday, the lowest since early October 2016.

Source: Yahoo Finance

Yield Curve Flattens

The yield on the longer-term 30-year bonds also fell to 2.123%, close to an all-time low reached in July 2016, leading to the flattening of the yield curve — a situation where there isn't much difference between longer-term and shorter-term rates.

Logically, a longer-term bond should yield higher than a shorter-term bond for the additional risk assumed in holding a longer-term security. A normal yield curve slopes upward.

A flatter yield curve could mean any one or more of the following:

• Falling inflation expectations: when inflation is not a concern, the future value of investments is preserved, necessitating less of a premium.
• Expectations of slower economic growth.
• Higher odds of the Fed raising interest rates.

Recession In The Cards?

The yield on the three-year Treasury bill, currently at 2.018%, is higher than the 10-year Treasury note yield, resulting in yield curve inversion.

The spread between the two maturities is about 38.6 basis points.

The inversion in the yield curve of these two maturities have historically signalled an impending recession.

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