Global yield curve inverts in signal a recession is brewing

A pedestrian passes in front of a tube releasing a cloud of steam near the New York Stock Exchange (NYSE) in New York, US - Bloomberg

Global bonds joined US peers in signaling a recession, with a gauge measuring the worldwide yield curve inverting for the first time in at least two decades.

The average yield on sovereign debt maturing in 10 years or more has fallen below that of securities due in one-to-three years, according to Bloomberg Global Aggregate bond sub-indexes. That has never happened before based on data going back to the beginning of the millennium.

The inversion of the yield curve is typically seen to herald a recession, as investors switch money to longer-term bonds due to pessimism over the economic outlook. Those fears are growing as policymakers around the world pledge further monetary tightening to tame rising consumer prices.

“Central bankers paralyzed by inflation fears will keep cash rates anchored in the restrictive zone for longer,” said Prashant Newnaha, a rates strategist at TD Securities Inc. in Singapore. “This will be a key catalyst for ongoing curve flattening.”

European Central Bank President Christine Lagarde on Monday signaled more rate hikes are likely, saying she’d be surprised if euro-zone inflation has peaked. Comments from four Federal Reserve officials on the same day flagged the probability that rates need to go higher.

Germany may already be in recession, while the US is likely to enter one by the middle of next year, according to Deutsche Bank AG strategists led by group chief economist David Folkerts-Landau in London.

The global yield curve inversion comes as bonds enjoy a rebound rally on prospects that a slowing economy will spur policymakers to slow or even halt rate hikes. The Global Aggregate index has gained 5% in November, heading for its biggest monthly gain since 2008.