Bond market flashes recession warning as portion of the yield curve inverts again

Be overweight on government bonds globally, says strategist
Be overweight on government bonds globally, says strategist

Renewed trade war fears triggered a bond market recession indicator on Thursday.

The yield on the 10-year Treasury note fell below that of the 3-month bill Thursday morning, inverting part of the yield curve. The yield curve is the plot of interest rates of bonds having equal credit quality but differing maturity dates. An inversion has been a reliable recession indicator in the past, though there is a debate over which segment of the curve is most important.

The Federal Reserve — as well as President Donald Trump's chief economic advisor Larry Kudlow — consider an inversion of the 3-month and 10-year curve as a key barometer.

By Thursday afternoon, the yield curve between the 3-month bill and 10-year note had steepened and was no longer inverted. At 4:22 p.m. ET, the yield on the benchmark 10-year Treasury note, which moves inversely to price, was lower at around 2.451%, while the yield on the 3-month Treasury bill yield hovered at 2.432%.

"I think that we're going into a recession. Look, I'm not going to sit here and pinpoint the day, the week or the month it's going to happen, but it's out there," said David Rosenberg, chief economist at Gluskin Sheff. "I think people tend to forget that the cause of the recession are the lags between the monetary policy tightening cycle and the eventual hit on GDP growth."

"So of course we're talking about trade right now, but my premise all along is that there is no 'get out of jail free' card after you've had a monetary policy tightening cycle like we had," he added.

Traders are closely following trade relations between the U.S. and China, as tensions continue to grow. On Wednesday, Trump said that China "broke the deal."

China allegedly walked away from written concessions in the trade talks
China allegedly walked away from written concessions in the trade talks

A Chinese delegation led by Vice Premier Liu He is in Washington to negotiate a permanent trade deal amid heated negotiations between Washington and Beijing. They face a midnight Thursday deadline set by Trump. The U.S. last year slapped tariffs on $250 billion worth of Chinese goods at a 10% rate, prompting Beijing to introduce its own duties on American goods.

Trump took many on Wall Street by surprise on Sunday when he announced that the U.S. tariffs would rise to 25% on Friday in light of attempts by the Chinese to renegotiate terms of the deal. China rebuked the U.S. on Wednesday, promising to take "necessary countermeasures" against the U.S. if Washington follows through on its threat.


Meanwhile, a measure of business prices underwhelmed economic forecasts in April, suggesting that inflation throughout the American economy remains tempered.

The Labor Department's producer price index, which tracks changes businesses pay for their goods and materials, rose 0.2% in April. Economists surveyed by Refinitiv had expected a 0.2% increase in the index. So-called core PPI, which removes volatile food and energy categories, rose 0.1% between March and April.

The U.S. trade deficit rose 1.5% from February to a seasonally adjusted $50 billion in March, the Commerce Department said Thursday. Economists surveyed by Refinitiv expected the U.S. trade deficit in March to widen to $50.2 billion from a revised $49.3 billion in February.

—CNBC's Silvia Amaro contributed to this report.