Global Bond Markets Are Flashing the Same Warning

Wherever you look in developed markets, sovereign bond yields are at their lowest levels in years as traders ratchet up bets that major central banks will be easing.

Yields in Australia and New Zealand dropped to record lows after a closely-watched part of the U.S. curve inverted on Friday as investors wager that the Federal Reserve will need to cut rates.

Treasuries have led a global debt rally amid bets that a rate-cutting cycle is coming. On Friday, the yield on 10-year notes fell below the rate on three-month U.S. bills for the first time since 2007 amid reports showing economic weakness in the U.S., France and Germany.

Money markets are pricing around a 90 percent chance that the Federal Reserve will cut rates by 25 basis points by December, followed by another reduction in September 2020. This comes after the central bank projected no hikes this year at its policy meeting last week.

Emerging Stress

The flight to safety is spurring sell-offs in some parts of emerging Asia. Yields on Indonesian debt due in 10 years climbed six basis points to 7.67 percent as investors ditch high-beta assets.

The inverted yield curve in the world’s biggest bond market is sending a negative signal for developing-nation assets, according to Win Thin, global head of currency strategy at Brown Brothers Harriman & Co. in New York.

“If sustained, it would signal a likely U.S. recession in the next six to 24 months,” he said. “This is hardly conducive to risk and EM assets, which we see remaining under pressure this week.”

Source: Bloomberg Finance L.P.

Chart: Used with permission of Bloomberg Finance L.P.

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