One of the most reliable warning signals for a recession just got a bit brighter. "It is signaling expectations of a growth slowdown", Deborah Cunningham, chief investment officer of money markets at Federated Investment Management Co in Pittsburgh, said of the parts of the curve that inverted.
Gundlach, who oversees more than $123 billion in assets, said: "If the bond market trusts the Fed's latest words about 'data dependency, ' then the totally flat Treasury Note curve is predicting softer future growth (and) will stay the Fed's hand".
US investors received a red flag Monday when the yield on five-year Treasury notes dipped below the yield on three-year and two-year Treasury notes for the first time since 2007.
In normal circumstances, it has an arcing, upward slope because bond investors expect to be compensated more for taking on the added risk of owning bonds with longer maturities.
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Usually it's the other way around, and it means investors are anxious about the short-term health of the economy.
Far from the US facing trouble, however, New York Fed President John Williams said on Tuesday the economy is strong and the base case outlook is for rate increases to continue through 2019.
The yield on the five-year Treasury dropped below the two-year and three-year Treasury yields on Monday.
The pan-European STOXX 600 index lost 0.76 percent.
No, at least not yet. This is seen as a portent of a US recession.
He added the need for the Federal Reserve to tighten monetary policy as fast as it is signalling had been reduced in recent times due to reduced activity in the USA housing and auto markets, highlighting that consumers are feeling the pinch of higher rates.
The dollar stumbled last week after Federal Reserve Chairman Jerome Powell on Wednesday said USA rates were nearing neutral levels, which markets interpreted as signaling a slowdown in rate hikes. If the trend in the graph below continues, there could be a two-year/10-year yield curve inversion by the end of 2018.
US stocks slumped almost three percent on Tuesday on some of the same growth concerns influencing bond investors as well as on doubts China and the United States would resolve their trade spat.
Of course, that's still "pretty doggone tight", said Randy Frederick, vice president of trading and derivatives at Charles Schwab.
It is a plot of the yields on all Treasury maturities ranging from 1-month bills to 30-year bonds.
That strategy has led the Fed to slowly but steadily raise interest rates, with a hike expected in December and three more next year.
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". For investors, though, it's a big deal for one simple reason: An inverted yield curve is often the dark cloud that precedes the storm.