What A Yield Curve Inversion Means For Traders

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Investors typically demand higher yields to commit money for longer periods of time.

The yield curve inversion and comments from Fed speakers are causing investors to rethink the potential of a recession or if rate hikes are nearing the top, said Minh Trang, senior FX trader at Silicon Valley Bank in Santa Clara, California.

The Dow Jones Industrial Average fell 799.36 points, or 3.1 percent, to 25,027.07, the S&P 500 lost 90.31 points, or 3.24 percent, to 2,700.06 and the Nasdaq Composite dropped 283.09 points, or 3.8 percent, to 7,158.43.

After months in which concern about the yield curve had eased, its sudden narrowing on December 3 could disrupt what had seemed a strong consensus at the Fed to continue raising rates through 2019.

"There can't be another screwup like last time, when they dropped "accommodative" but simultaneously characterized the Fed funds rate as "a long way" from neutral", Gundlach said.

The yield curve "tells me that it's wise to be patient here", Kaplan told Reuters in Laredo, Texas where he is meeting with business leaders and bankers. By bidding up the prices for long-term bonds, investors can send longer-term bond yields downwards - even, at times, to the point where they fall below yields on shorter-term bonds.

Meanwhile, the flattening United States yield curve weighed on investors' minds.

The Fed's target inflation indicator has held stable right around the two percent target, while the recent plunge in oil prices by more than 30 percent has eased fears of spiraling price increases.

"The US economy is likely to be able to withstand another rate hike or two, therefore the flattening of the Treasury curve looks a little over done".

"We should be data dependent but not reacting to every wavering of the needle across the dial..."

Regardless of other possible reasons, "it is mainly indicative of worries about how long growth in the USA can remain so strong".

Federal Reserve Chairman Jerome Powell speaks on a television as traders work on the floor of the New York Stock Exchange in New York, U.S., February 27, 2018.

Though it is not certain the narrowing in spreads is related to doubts about economic growth, alternate explanations would not necessarily be helpful to the Fed either.

MSCI's gauge of stocks across the globe shed 2.16 percent, its worst performance since October 11.

What exactly is a yield curve, and why is it inverting?

But since then, it has persistently declined, especially since the middle of last week, and now is at its narrowest since July 2007, on the eve of a steep recession.

Italian bonds extended their rally, with two-year yields falling 10 bps to 4 1/2-month lows after a cabinet official raised hopes that the government could cut almost four billion euros from its 2019 budget plans.

"What sounds good at the dinner table becomes rather hard at the negotiating table - the market now knows how to read Trump, he knows how to create big news at bilateral meetings but then when it comes to the nitty gritty it can be a very different story", he said.

A typical yield curve includes much higher interest rates for maturities further into the future.

The outlook for US growth, by contrast, he said remained strong.

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