Bonds

Yield curve inverts again Friday as Trump reignites fears the trade war will lead to a recession

The critical spread between the 10-year Treasury yield and the 2-year yield inverted multiple times throughout Friday's trading session after President Donald Trump ordered American companies to steer clear of trade with Beijing.

The president tweeted Friday morning that he was ordering "our great American companies" to "immediately start looking for an alternative to China, including bringing your companies HOME and making your products in the USA."

Early Friday afternoon, the yield on the benchmark 10-year Treasury note traded at 1.535%, while the yield on the 2-year Treasury note held at 1.513%, an inversion of a key segment of the U.S. yield curve. The rates dipped into and out of inversion throughout the rest of the trading session.

An inversion of the 2-10 yields is viewed by fixed income traders as a recession prognosticator, but trying to forecast exactly when GDP growth contracts is harder to project.

Inversions of that part of the curve have predated every recession over the past 50 years and the last five 2-10 inversions have all led to recessions. Still, even when it does predict a recession, yield curve inversion is, on average, 22 months early, according to Credit Suisse.

The movement in the bond market on Friday was largely pegged to Trump's social media barrage, which sparked fears on Wall Street that the trade war between the U.S. and China isn't close to a resolution and could worsen over the next few months. China announced earlier Friday that it will retaliate against new U.S. tariffs with its own levies on $75 billion more of U.S. goods and resume auto tariffs.

Jerome Powell, chairman of the U.S. Federal Reserve, speaks during a news conference following a Federal Open Market Committee (FOMC) meeting in Washington, D.C., U.S., on Wednesday, March 20, 2019.
Andrew Harrer | Bloomberg | Getty Images

Markets also moved on Friday after Fed Chair Jerome Powell spoke from the central bank's annual symposium.

Though Powell didn't repeat his now-infamous July 31 comments that the Fed's recent rate cut was merely a "midcycle adjustment," he did not promise additional easing as some investors had hoped. Trump himself appeared to have been hoping for a more dovish speech from the Fed chair and took to Twitter to register his complaint.

But instead, Powell's speech focused on the impact the trade war is having on the business outlook.

Regarding the Fed's dual mandate of full employment and price stability, Powell said the "economy is close to both goals. Our challenge now is to do what monetary policy can do to sustain the expansion so that the benefits of the strong jobs market extend to more of those still left behind, and so that inflation is centered firmly around 2%."

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"Powell's comments were initially read as dovish; but not any more dovish than what came out of the July FOMC statement, press conference, and Minutes," Ian Lyngen, head of U.S. rate strategy at BMO Capital Markets, wrote in an emailed statement.

"The emphasis on overseas developments was notable," he added. "Brexit, Hong Kong, Germany and China — not new to this market but an acknowledgment that this isn't a problem limited to the trade war."

The U.S. yield curve, the plot of Treasury rates based on maturity duration, steepened following the chairman's address from the Fed's annual symposium in Jackson Hole, Wyoming. The spread between the 2-year Treasury yield and that of the 10-year note inverted for the third time in less than two weeks on Thursday.

Much of Powell's Jackson Hole speech concerned the mounting impact of Trump's trade wars on business sentiment and investment as ongoing headwinds to the American economy.

Those fears, the Fed has said, keep U.S. C-suites on edge, apprehensive about starting new building projects, establishing fresh supply chains and making other long-term business deals.

That angst resurfaced earlier Friday morning, when the Chinese State Council said it decided to slap tariffs ranging from 5% to 10% on $75 billion in U.S. goods, in two batches effective Sept. 1 and Dec. 15.

— CNBC's Jeff Cox contributed to this report.

Treasurys