GRAPHIC-Bond market "recession gauge" falters outside United States
(Repeats Friday item)
By Tom Finn and Ritvik Carvalho
LONDON, Dec 21 (Reuters) - An inverted government bond yield
curve is a fairly reliable omen of recession in the United
States but its track record elsewhere is less impressive,
including in major economies such as Germany and Japan.
The gap between two- and 10-year U.S. Treasury yields shrank
this week to its narrowest since 2007 at just 9 basis points,
driven by concern that the Federal Reserve seems bent on raising
interest rates even though economic indicators are weakening.
A less closely-watched section of the U.S. bond curve did
briefly invert recently and it appears only a matter of time
before long-dated yields fall definitively below shorter-dated
Curves are flattening outside the United States too, partly
because of the powerful influence of the U.S. market. The German
yield curve, for instance, is close to its flattest in more than
But what in the United States is seen as a classic sign of
financial markets bracing for recession is not read the same way
The U.S. curve has inverted before each recession in the
past 50 years. It offered a false signal just once in that time.
"The predictive power of the yield curve outside the United
States is very flimsy at best as there are other factors at play
such as heavy pension fund demand in the United Kingdom and
safe-haven bid for German debt in episodes of euro zone
political crisis," said Kaspar Hense, a portfolio manager at
BlueBay Asset Management.
The link seems weakest outside Europe. In Australia for
instance, the yield curve has inverted four times since 1990 but
was only once followed by a recession. Growth merely slowed
following the other three inversions.
Japan's yield curve has not inverted since 1991 despite the
country suffering several recessions in this period, including a
crash in 2014 caused by the government raising sales tax. In
fact, it is hard to find any relationship between the yield
curve and the Japanese economy.
In Britain, the relationship between the yield curve and
the occurrence of recessions is also not as strong as in the
United States. The UK gilt curve inverted in 1985 and in 1997
but there were no recessions in the following 12 months.
More recently, the gilt yield curve flattened each time
there has been a rise in concern about a "no-deal" Brexit,
reflecting concern that the economy will take a hit. That leads
many to believe Britain's departure from the European Union, by
clouding the economic future, is a crucial influence on the
The German yield curve's knack of predicting recessions
perhaps comes closest to matching that of U.S. Treasuries.
Recessions occurred after the German curve inverted in the
mid-2000s and 2009.
But the curve failed to invert during the European debt
crisis in 2012 when Germany went into recession.
In Europe's biggest bond market, Italy, the curve reached
its flattest since 2011 earlier this year following
a political crisis that raised fears about the country's
commitment to the euro. Still, only one of five Italian
recessions since 2000 has been precluded by an inverted yield
Central bank stimulus may be one reason why the predictive
power of bond markets in general has diminished over the years.
Trillions of dollars in central bank cash pumped into the
financial system can cap long-term bond yields, irrespective of
This is clear in Japan where the central bank's ultra-loose
monetary policies have frequently worked to depress bond yields.
(Additional reporting by Saikat Chatterjee; Editing by Dhara
Ranasinghe and David Stamp)
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