Global yield curve inverts in signal that recession is brewing

The average yield on sovereign debt maturing in 10 years or more has fallen below that of securities due in one-to-three years. PHOTO: AFP

SYDNEY – Global bonds joined US peers in signalling a recession, with a gauge measuring the worldwide yield curve inverting for the first time in at least two decades.

A yield curve is a line that plots yields (interest rates) of bonds having equal credit quality but differing maturity dates.

The average yield on sovereign debt maturing in 10 years or more has fallen below that of securities due in one to three years, according to Bloomberg Global Aggregate bond sub-indexes. That has never happened before, based on data going back to the beginning of the millennium. 

The inversion of the yield curve is typically seen to herald a recession, as investors switch money to longer-term bonds due to pessimism over the economic outlook. Those fears are growing as policymakers around the world pledge further monetary tightening to tame rising consumer prices.

“Central bankers paralysed by inflation fears will keep cash rates anchored in the restrictive zone for longer,” said Mr Prashant Newnaha, a rates strategist at TD Securities in Singapore. “This will be a key catalyst for ongoing curve flattening.”

European Central Bank president Christine Lagarde on Monday signalled more rate hikes are likely, saying she would be surprised if euro zone inflation has peaked.

Comments from four US Federal Reserve officials on the same day flagged the probability that rates need to go higher.

Germany may already be in recession, while the United States is likely to enter one by the middle of next year, according to Deutsche Bank strategists led by group chief economist David Folkerts-Landau in London.

The global yield curve inversion comes as bonds enjoy a rebound rally on prospects that a slowing economy will spur policymakers to slow or even halt rate hikes. The Global Aggregate Index has gained 5 per cent in November, heading for its biggest monthly gain since 2008. BLOOMBERG

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