Bond ETFs Rallying After Fed Pivot

A man is reflected on an electronic board showing a graph analyzing recent change of Nikkei stock index outside a brokerage in Tokyo

But the U.S. yield curve inverted on Friday, when three-month U.S. Treasury bills yielded more than 10-year Treasury bonds, and that triggered a wave of commentary from economists and market watchers who believe that inversions often predict recessions.

The benchmark index wavered again on Wednesday: It was down as much as 1.1 per cent in midday trading, ending the day off 0.5 per cent as the inversion deepened amid the latest batch of discouraging global economic news.

The 10-year US treasury yield edged up to 2.442%, having shed five basis points on Monday and a whopping 17.5 basis points since the US Federal Reserve, last week, ditched projections for raising rates this year.

Experts may need to reassess their economic forecasts, especially the Federal Reserve, which is projecting a 2,1% percent economic growth for this year.

The yield curve inverts when long-term interest rates fall below the level of short-term ones.

"The US yield curve continues to be inverted", said Michael Every, Hong Kong-based senior Asia-Pacific strategist at Rabobank.

Benchmark U.S. 10-year notes last rose 12/32 in price to yield 2.414 percent, from 2.455 percent late on Friday.

Canadian yields trade as much as 98 basis points below USA yields, while money markets have shifted this month from expecting further interest rate hikes from the Bank of Canada to seeing about a 75 percent chance of a cut by December. This development, known as "inversion" in bond market parlance, happened for the first time since 2007 on Friday. "For now we have to see this week's auctions", he said.

The Treasury Department will sell $US113 billion in coupon-bearing supply this week, including $US40 billion in two-year notes on Tuesday, $US41 billion in five-year notes on Wednesday and $US32 billion in seven-year notes on Thursday.

Investors will also be watching Fed policy makers scheduled to speak on Tuesday.

Japan's Nikkei jumped 2.1% after recording its biggest drop since late December on Monday, India jumped more than 1%, but China's blue-chip CSI300 index dropped more than 1% as trade war worries remained.

The Fed Funds futures market is now fully pricing in a possible rate cut by year-end, and we expect that the 10-year U.S. Treasury yield will make a run for the 2.3 percent handle amid month/quarter-end re-positioning flows. These products won't decline almost as much if interest rates reverse course and they still offer relatively attractive yields.

The US dollar was a shade higher at 110.14 yen, having hit a 1 1/2-month low of 109.70 yesterday.

May said yesterday there was not yet enough support to put her Brexit deal to a third vote in parliament.

Among commodities, oil prices hovered below their recent four-month peaks, as the prospect of tighter USA crude supply was offset by concerns about a slowdown in global economic growth.

US crude futures traded at $59.26 per barrel, up 0.5 percent on day, a tad below Thursday's high of $60.39, its highest since mid-November.

Gold retreated from the more than 3-week highs touched in the previous session.

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