U.S. Treasuries: Throwing Curves

Mid Week Bond Update

U.S. Treasuries: Throwing Curves

U.S. Treasury yield curve inversions aren't all alike; Saudi Aramco's bonds set a new record; Italy's slowdown highlighted its continuing budget deficit challenge.

Beyond Inversions: The Signals Behind the Moves

Inversion of the yield curve for U.S. Treasury securities is one of the most reliable harbingers of economic recession – with a lag time anywhere from 6 to 18 months. So when the most carefully-watched measure of inversion, the spread between 3-month and 10-year Treasury yields, crossed into negative territory on March 22 of this year – reaching a low of -11.32 basis points (bps) on March 27 before moving back above zero on March 29 – market participants already concerned about the current economic expansion took notice.

The last time the 3-month/10-year spread stayed in negative territory for an extended period was between July 2006 and May 2007; economists date the beginning of the 2007-2009 recession at December 2007, lasting until June 30, 2009.

However, at the same time the 3-month/10-year spread was heading downward, the 5-year/30-year spread was rising – sending a positive signal about markets' expectations on long-term inflation rates rather than the liquidity signals for the banking sector implied by the 3-month/10-year spread.

Of course, it’s possible that changes in the financial landscape since the 2008 financial crisis could blunt the impact of the negative spread on the banking sector – the principal reason that this spread is so closely followed. To see why, read Western Asset’s thoughtful analysis on how to view the significance of inversions.

Different Curves, Different Signals

Chart courtesy of Western Asset. Source: Bloomberg, as of 4/9/2019. Past performance is no guarantee of future results. This information is provided for illustrative purposes only and does not reflect the performance of an actual investment.

On the rise:
 Saudi Aramco's first bond issue

Orders for the newly-issued $12-billion emerging market (EM) bond issuance of Saudi Aramco, the Kingdom of Saudi Arabia (KSA)'s oil company and the world's largest, set a record of $100 billion, the world's largest order for EM bonds. That's larger than the previous-record-holder, the $60 billion of orders for Argentina's 2016 bond issue. The orders amount to over eight times the size of the offer. It's expected that the price the bonds will fetch will drive its yield below that of the sovereign bonds of Saudi Arabia itself – a highly unusual market event. The strong take-up of the $12 billion of bonds is a testament to the size and depth of the dollar-denominated EM bond market.

The bond sale, which required the disclosure of the company's financials for the first time is viewed by many as a prelude to a much-anticipated equity offering. Based on those financials, the company appears to be larger than the combined value of Apple Inc., Alphabet Inc. (Google's parent company) and Amazon.com combined – as well as more profitable.

On the slide: Italy's GDP Forecast

Italy's ongoing discussions with the European Commission about its forecasts for the country's budget shortfall got another setback and a novel stopgap measure.

Growth for the full year 2019 is now forecast to grow by 0.1%, vs. a previous forecast of 1.0%, according to two senior officials. If so, that downward revision would ripple through the country's financials to drive its budget deficit up to between 2.3% and 2.4% of GDP – notably above the level of 2.04% agreed with the European Commission in negotiations last year.

The short-term remedy, according to other sources, will be to use a contingency fund of €2 billion ($2.2 billion) to ensure its deficit target is met. Deputy Finance Minister Valdis Dombrovskis pointed out that though novel, this remedy was provided for in Italy's negotiated agreement with the EU over the possibility of just this sort of eventuality.


All data Source: Bloomberg as of April 9, 2019 unless otherwise specified.


The yield curve shows the relationship between yields and maturity dates for a similar class of bonds.

Inverted yield curve refers to a market condition when yields for longer-maturity bonds have yields which are lower than shorter-maturity issues.

spread is the difference in yield between two different types of fixed income securities with otherwise similar characteristics. 

Emerging markets (EM) are nations with social or business activity in the process of rapid growth and industrialization. These nations are sometimes also referred to as developing or less developed countries.



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