The US market sent a warning signal last week, with the largest, most liquid market in the world flashing an inverted yield curve. This occurred despite President Trump’s trade war with China remaining in place, and the subsequent 30-day delay on tariffs for Canada and Mexico.
An inverted yield curve signals that investors expect high inflation in the short term and low growth in the long run. This is a “Trump trade” first introduced by analysts at Barclays and Morgan Stanley last year, which is currently in profit.
If bond markets believed Trump’s trade war would lead to economic growth, we should see the opposite dynamic in treasuries. However, with the longest-term debt rates growing at a slower pace than short-term debt, it appears the market is preparing itself for recessionary dynamics.
One week does not make a trend, and the yield curve may be subject to mean reversion or other factors. Nonetheless, given Elon Musk’s involvement in controlling the Treasury purse strings, it’s essential to keep an eye on treasuries going forward.
The bond market often provides macro signals that are not always reflected in the stock market. While it’s too early to say what the bond market interprets Trump’s policies to be, after one week under his trade war, it’s clear that a recession is a possibility and the market is positioning itself for it.
Source: https://www.splinter.com/trumps-trade-war-and-elons-coup-mean-its-time-to-learn-about-inverted-yield-curves-again