US economy

US yield curve measure inverts for first time since 2007


A key measure of the US yield curve watched by the Federal Reserve and seen as an indicator of a coming recession inverted for the first time in over a decade on Friday, compounding concerns over slowing US growth following the Federal Reserve policy shift this week.

The difference between the three-month and 10-year yields turned negative for the first time since August 2007, moving to minus 1 basis point, following the Federal Reserve’s U-turn over its expectations for further interest rate increases.

Other measures also edged lower. The difference between two- and 10-year yields dipped below 10 basis points for the first time this year. This is the primary indicator that investors watch because it has inverted — where short-dated yield rise above longer-dated yields — before every recession since the second world war.

The yield curve is created by lining up the yields of ascending maturity Treasuries on one graph. Typically it slopes upward, but as the prospect of slowing growth intensifies, short-dated interest rates can rise above longer-dated interest rates.

Some investors and policymakers have aired caution over using the yield curve as an indicator of recession, in part because the time it has taken for the economy to turn after the yield curve has inverted has been up to three years on occasions.

The inversion spooked markets on Friday, however. Wall Street lurched lower in the opening minutes of trade. US stocks, which rallied in the previous session, were deep in the red.

The S&P 500 fell 0.9 per cent to 2,828.97. Utilities and real estate, whose reliable dividends give them bond-like properties, were the only major sectors in the black. Financials and energy led the decline, each down about 2 per cent.

Additional reporting by Mamta Badkar in New York



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