- US treasury yield curve or the spread between the 10- and two-year yield has dropped to eight-month lows.
- The yield curve may invert on escalating US-China trade tensions and dovish Fed expectations.
The US treasury yield curve, as represented by the spread between the 10-year and two-year bond yields, is currently the flattest since December 2018.
As of writing, the spread is seen at 0.097 basis points – down more than 17 basis points from the high of 27.5 basis points seen on July 18.
Notably, the benchmark 10-year yield, which stood at 2% on July 31, fell to 1.59% on Wednesday and is now trading at 1.70%, meaning the yield is down 30 basis points on a month-to-date basis.
Investors have rushed for the safety of government bonds amid escalating US-China trade tensions.
President Trump said on Aug. 1 that the US will impose an additional 10% tariff on $300 billion worth of Chinese goods from next month, abruptly ending the month-long trade truce.
In response, China has allowed the Yuan to depreciate beyond 7 per US Dollar.
That, in turn, has bolstered expectations of aggressive easing by the US Federal Reserve (Fed) before the year-end.
Curve inversion ahead?
An inverted yield occurs when the long duration bond yield drops below the short duration bond yield.
An inverted curve between the 10 and two-year yields is widely considered a recession indicator.
With escalating trade tensions and increasing dovish Fed expectations, the investors are worried that the curve would invert.
It is worth noting that the spread between the 10-year and three-month yield has already turned negative. It is currently seen at -31 basis points, having hit a low of -0.40 basis points earlier this week.
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