US Treasury 30-Year Bond Yield Hits Record Low, Economy Heading for Recession?

By Glenford S Robinson

The US Treasury 30-year bond yield has hit rock bottom, hitting a new low of 1.98% on Thursday, August 15, 2019, as bond investors begin to fear the likelihood of the US economy heading for recession. This new 30-year Treasury bond yield low mark is the lowest level on record, beating out the previous low mark of 2.03 % in August of 2019.

The 30-year Treasury yields have plummeted 27 basis points this week already, giving up the largest one-week plummet since May 2012. Such bond-yield declines could be a signal that the US economy is heading for a recession or an economic slow-down. Don’t be alarmed too much. An economic recession is a normal part of the business cycle.  Such gigantic declines of the 30-year Treasury yield could have been influenced by the ongoing US-China trade war. This is because the 30-year Treasury yield is a reflection of how long-term Treasury bond investors feel about the direction of the economy. So, if they feel that the economy is destined to do worse than it is currently doing, they will lock-in current rates before these rates fall even lower. Short-term investors on the other hand, can wait for their T-bills to mature in a few months, which gives them the flexibility to buy higher-yielding securities should the opportunity presents itself. Long-term bond investors don’t have such luxury.

So, from a graphical perspective, this is why the relationship between the long-term yield and the short-term yield is called the inverted yield curve when the values of returned yields flip between the two securities (US 30-year Treasury bond). The long-term investor who is entitled to higher-yielding returns for his longer exposure to risk (longer risk exposure time of not getting paid back) now is settling and locking in lower yielding returns as compared to the short-term investor who is entitled to get lower-yielding returns (exposure to less risk; shorter time to get money back) as a result of the short-term nature of the loan or bond to the loan or bond issuer.  

The infamous inverted yield curve is used to forecast economic recession and it too has shown itself a few times recently, flip flopping its way into the hearts of paranoid investors. The take-away from this is that for a true economic recession to occur, the inverted yield curve must remain inverted for many months to qualify as a true predictor of economic recession.

August and September are the worst months of the year for financial markets. This is when people go on vacations; This is when students are out of school; this is when department store sales and other retail sales are down. This is why the volatility barometer goes up. Therefore, long term investment decision should not be made during these highly volatile periods. In fact, it is during these times millionaires are made. Volatile times like these create millionaires because millionaires are made when fear is in the streets, panic investors running for the hills and millionaire investors running to buy up shares of stocks and foreign currencies at rock bottom prices.

So, with all this said, how does the current economic condition affect the EUR/USD currency pair? Well, the current economic condition mention in this article strictly pertains to the US economy. However, whatever happens in the US economy greatly affects and impacts the global economy as well. In regards to the Eurozone economy, which is exhibiting poor economic outlook, economic stimulus is the talk of the town in the Eurozone. This kind of talk does not bode well for the Eurozone currency, the Euro. So, coupled with the regions 0% interest rate policy, the Euro is very weak. So, when negative economic factors influence the US dollar, the Euro benefits, but ever so slightly. For example, a report of negative jobs report may send the EUR/USD trending up the charts. However, such a bullish trend is often short lived, and sooner or later the pair will come crashing down the charts on a piece of positive economic announcement for the USD. This is volatility in a nutshell, displayed in the Forex market.  

Here is the meaning of the securities mentioned in this article. US Treasury bills are issued for terms less than one year; US Treasury notes are issued for terms of two, three, five, and 10 years, and Treasury bonds are issued for terms of 30 years. These securities were reintroduced in February 2006.

Disclaimer: Mstardom Finance and Mstardom, Inc., and writers We are not investment advisors. Please visit our detailed disclaimer at mstardom.com/terms


source: tradingeconomics.com

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