Dollar pressured by falling U.S. yields; recession fears

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Federal Reserve Chairman Jerome Powell speaks on a television as traders work on the floor of the New York Stock Exchange in New York, U.S., February 27, 2018.

Simply, the yield curve tends to invert before economic downturns.

The MSCI's all-country index shed 0.5 percent.

However, analysts said as traders grew anxious about sagging United States growth, longer-dated Treasury bond yields have been sharply weighed down.

Here's what that does: Yields on short-term bonds rise above those of longer-term bonds, historically a signal that an economic slowdown is around the corner.

Another big recession indicator is the recent weakness in housing.

In August, the San Francisco Fed said in a study that the historical correlation between the yield curve inversion and recessions do not confirm "cause and effect".

Not yet. The yield curve inversion reflects what investors believe at the moment, and historical patterns don't guarantee that an event will occur in the future.

Instead of just reflecting investors losing faith, Fed officials have argued that the recently narrowing gap between short- and long-term Treasury bonds could reflect long-term shifts in global capital flows, or the fact that all interest rates are lower and more compressed together than they used to be.

In separate remarks on early December 3, Fed vice chair Randal Quarles said the central bank, while "data dependent", was following a strategy that would not be thrown off course by "every wavering" of economic statistics. "We have described in all the communications tools a path that is pretty clear", Quarles said.

Regardless of other possible reasons, "it is mainly indicative of worries about how long growth in the USA can remain so strong".

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According to Forbes, the Fed has played a major part in suppressing long-term interest rates while raising short-term interest rates.

Though it is not certain the narrowing in spreads is related to doubts about economic growth, alternate explanations would not necessarily be helpful to the Fed either. "Keep it simple. Quantitative Tightening is bad for stocks".

For the first time in a decade, a part of the yield curve inverted.

But since then, it has persistently declined, especially since the middle of last week, and now is at its narrowest since July 2007, on the eve of a steep recession.

Bianco research noted today "There has not been one instance where the 2-year 5-year spread inverts and the 3-month 10-year spread didn't".

Whatever the situation with the Fed and the USA markets, emerging markets may be effected even more than the US economy.

The term premium refers to the higher interest rate investors typically demand to commit money for longer periods of time.

Signals from the Federal Reserve last week that it may be nearing an end to its three-year rate hike cycle has pushed the 10-year US Treasury yield to three-month lows below 3 per cent.

The outlook for US growth, by contrast, he said remained strong.

The Cleveland Fed, meanwhile, has focused on the difference in yields between three-month Treasurys and 10-year Treasurys.