German yield spread tightest since 2017 as USA curve flattens

German yield spread tightest since 2017 as USA curve flattens

German yield spread tightest since 2017 as USA curve flattens

Other forces may be at work that would not necessarily change the Fed's underlying plans, such as a recent drop in oil prices that could hold down the interest demanded by investors by lowering expected inflation.

That is to say, almost everyone is convinced the two-year to 10-year if not the 3-month to 10-year spread will invert.

The greenback rose 0.32 percent against the Japanese yen and the euro gave up all its early gains to trade down 0.04 percent against the dollar.

Far from the USA 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 comments came after those from Fed chair Jerome Powell last week, which lifted stocks as they were interpreted as suggesting a less aggressive path of rate hikes.

"Today's move feels like the market is a scorned lover".

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"I think the dollar can be in correction-mode in a yield-curve inversion environment", he added.

German 10-year yields are also being pushed down by domestic concerns, Commerzbank's Rieger said, with European growth indicators sagging and Italian political concerns rumbling on in the background. It has spread to the eurozone, where the German 2-10 yield curve is at its flattest since mid-2017 at 85.70 basis points.

The theory may get a test soon.

On Tuesday, three-year Treasury yields fell below two-year notes for a brief moment before bouncing back.

Investors are increasingly concerned, however, by a flattening of the spread between two- and 10-year Treasurys, a more fundamental benchmark of market health.

The dollar edged up on Wednesday but remained under pressure as an inversion in part of the Treasury yield curve caused concern about a possible US recession.

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Even as the announcement of a "truce" in U.S.

Earlier this week, interest rates on 3-year Treasury notes turned higher than 5-year rates for the first time since the dawn of the previous US recession, back in 2007. Delaying the hike would reinforce the markets fear and prove that the Fed also fears a slowdown.

Williams, a permanent voter on policy and considered among the top economists at the central bank, said in September an inversion would not be "worrisome" or a "deciding factor" in setting policy.

In separate remarks on early December 3, Fed vice chair Randal Quarles said the central bank, while "data dependent", was following a strategy that would not be thrown off course by "every wavering" of economic statistics. "While the current environment is somewhat special - with low interest rates and risk premiums - the power of the term spread to predict economic slowdowns appears intact".

But markets are doubtful. The same happened with three- and five-year spreads for the first time in 11 years. It was still positive on Tuesday at 0.12 percentage points. A rate hike however, while signaling confidence by the Fed, would continue to make financing more expensive for firms and households. "I'm anxious that they won't".

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