Mounting warnings of a global recession
29 March 2019
The world economy is showing signs of significantly lower growth, if not an outright recession, with the warning lights flashing in both financial markets and the real economy.
In the past week the yield on US 10-year Treasury bonds has fallen sharply and on some occasions has dropped below the rate on shorter-term Treasuries. This is significant because under “normal” circumstances rates on longer-term bonds are higher than those obtained on short-term debt. The “inversion of the yield curve” points to rising financial uncertainty as investors seek greater security and is regarded as an indicator of recession.
Other interest rates, most notably on German bonds that like US Treasuries are regarded as a safe haven, have also fallen and in some cases are in negative territory. On Wednesday the German government issued €2.4 billion of 10-year bonds with an interest rate of minus 0.05 percent. The issue was oversubscribed 2.6 times meaning they could have raised €6.3 trillion.
The growing nervousness in financial markets is also indicated in a report from Bloomberg earlier this week which said the amount of global bonds with a negative yield had gone over $10 trillion.
Negative yield occurs when the price of the bond rises so high due to investors seeking security that if it were held to maturity it would produce a loss on the investment.
The immediate starting point of this shift was the indication from the US Federal Reserve following the meeting of its Federal Open Market Committee (FOMC) earlier this month that it was contemplating no interest rate increases this year—a sharp reversal from the position at the end of last year when at least two interest rates were anticipated for 2019.