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Warning signal from the US debt markets

26 March 2019

The yield on three month US Treasuries has risen above that on 10 year US government bonds in recent days, sparking fears of a recession (see chart above).  The last time this happened was back in 2007, during the global financial crisis.  While an inverted yield curve often indicates that grow is poised to slow and inflation weaken, some market watchers caution that this time is different.  The US Federal Reserve has been raising short term interest rates not due to inflationary fears, but to “normalize” policy after a period of zero interest rates. While the signal the government debt market is sending is unclear, it is attracting attention among analysts, and most bulls would feel much more comfortable with a steeper yield curve. A recession is not expected by most market watchers, but if materializes would result in less cargos and downward pressure on freight rates. The consensus view remains that the global economy will continue to expand in 2019, supporting higher rates in the second half of the year.

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