A popular barometer of an impending economic slowdown dropped to a fresh decade low on Thursday as investors digested the Federal Reserve’s commitment to further monetary policy tightening and its weaker forecast for US economic growth and inflation.
The difference between two- and 10-year Treasury yields, a common permutation of the so-called yield curve, sank below 10 basis points for only the second time this year, and hit 9.87 basis points in morning trading on Thursday. It’s the lowest level for the measure since June 2007.
The yield curve has garnered attention from investors because it is seen as a predictor of economic slowdown. An inverted yield curve — where short-dated Treasury yields rise above longer-dated ones — has preceded every US recession since the second world war.
The drop comes after the Federal Reserve on Wednesday raised interest rates Wednesday and forecast a two (versus their previous forecast of three) rate increases for 2019, helping push shorter-dated yields higher. But continued concern over the pace of US growth going forward, as well as a reduction in where the Fed expects its long-term target interest rate to be, weighed on longer-dated yields.
The prospect of a slowdown in the economy also hit the US stock market as investors adjusted to the increased pressure on corporate profits.
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