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Treasurys signals couldn’t have worse timing

Treasury yield curve inversion that’s throwing eye-catching shapes in closely watched rates elsewhere, is one of the reasons why a softer dollar isn’t easing risk aversion. The gap between two and 10-year Treasurys shrunk to the narrowest in around 11 years earlier. This lifts the curve created to within 13-14 basis points of ‘inversion’, the traditional harbinger of a coming U.S. recession. The gap between Germany’s two and 10-year bonds duly narrowed to the tightest in 17 months. Investors in Europe’s ‘growth engine’ are signalling that any future U.S. downturn, which consensus forecasts pin no sooner than late 2019, would eventually be mirrored on the continent.

All told, U.S. Treasurys are back in focus for the umpteenth time this year, though this time most of the interest is watching the downside. Fragile sentiment can be expected to over-react, whilst the emerging downtrend in yields also looks like an over-riding factor for the dollar. Additionally, the second testimony of Fed chair Powell to congress this year has been postponed due to commemorations of President H.W. Bush on Wednesday. With markets closed, attention on yield events, via futures, should be closer.

As the yield curve flattens, a break of its 10-year yield below the long-term trend marker (the 200-day moving average) for the first time since November 2017, is being closely watched. Traders will treat a close beneath the 200-DMA as an important juncture, increasing pressure on the dollar. In turn, this could propel symbiosis with yields further, as they both spiral downwards. Yield drama could subside later in the week, in the run up to the release of payrolls on Friday. As usual a number of unofficial curtain raisers, including ISM data, will precede payrolls. It is quite likely that these data will continue to paint a firm picture of U.S. hiring. This will bolster views that the U.S. economy remains robust. But after the 10-year yield definitively busted its cleanest rising line since September and as it now threatens another key indication of strength, broader markets are unlikely to escape continued tests this week.


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