Over the past year, I have written about treasury yields on several occasions. The most recent commentary was back in March when one segment of the yield curve did invert, but it wasn’t the segment that most economists watch for a recession warning sign. There was also an article back in October where I expressed my concern about the 10-year treasury yield jumping more than two percent from its most recent low.
Ironically, the yield on October 8th, the day before the article about the 10-year yield was published, was a peak. Bonds rallied a little to push the yield down and then sold off one more time to push the yield back up to 3.23% on November 8th. Treasuries have rallied since then and it has driven the 10-year yield down to 2.23%.
We never quite reached the 3.336% level that would have marked a two percent increase from the low in 2016, but we got extremely close. Back then, the yield on 2-year treasury notes was just under 3% and was rising rapidly. There were concerns about an inverted yield curve between the 2-year and 10-year treasuries, the most watched segment of the yield curve. In the fall, the concerns came from the fact that the yield on the 2-year was climbing faster than the 10-year.
Flash forward a little over six months, and the concerns about the 2-year and 10-year inverting are back. The concern now is that the yield on the 10-year has been falling faster than the 2-year.
As of Wednesday morning, the yield on the 10-year has fallen an entire percentage point from the November high—from 3.23% to 2.23%. The yield on the 2-year has fallen from a high of 2.98% on November 8, to a yield of 2.06%.
The article in March noted that the 3-month Treasury and the 10-year had indeed inverted. While the 10-year yield has fallen sharply in the last six months, the 3-month yield has hardly changed at all. The 3-month was yielding 2.303% on November 8 and it is yielding 2.298% currently. This scenario has caused the 13-week/10-year curve to invert by the greatest amount since 2007. As of today, the inversion level between the yields was at 12.3 basis points.
It is also interesting that the treasury rally hasn’t been confined to the United States. With the prospect of the U.S. 10-year falling down to the 2% level for the first time since 2016, sovereign debt from a number of different countries has been rallying. New Zealand and Australia both saw record low yields on similar dated debt instruments. Similarly dated debt from Japan’s government hit a three-year low. Germany’s equivalent bunds saw their yields drop to the lowest level since 2016.
The global sovereign debt rally is being driven by a number of factors, but the most notable is the ongoing trade war between the U.S. and China as well as a potential trade dispute between the U.S. and Europe. The second factor that seems to be driving the bond rally is the apparent economic slowdown around the globe.
This is obviously a major concern for investors. When we start seeing comparisons in yield curves to what we saw in 2007—that worries me. When the global economy is slowing, and we have a trade war between the two largest economies in the world—that worries me.
In the last few weeks, I have suggested to the subscribers of my Seeking Alpha newsletter that they add some hedge positions. We have closed out some stock holdings and added inverse ETFs to help protect the overall portfolio. Those subscribers pay for that information, so I wouldn’t feel right about sharing the specifics here. But I would suggest to Bull Market Rodeo readers that you make some changes to your portfolio. Now is not the time to have a high equity allocation.