US yield curve inverts to levels last seen in 2007

US Treasury yield curve continued to invert on Tuesday with the spread between the 10- and two-year yields falling to -5 basis points, the lowest level since 2007.

The inversion, where long-term borrowing costs fall below the short-term ones, is widely considered an advance warning of an impending recession. In fact, curve inversions have preceded US recessions of the past 50 years.

Some observers believe the curve inversion is not a reliable indicator anymore. After all, the US bonds have a safe haven appeal and are currently yielding more than their G-7 counterparts. So, the US bonds, particularly at the long end of the curve, tend to attract overseas demand.

Also, the recession fears appear overblown as the US consumer is still holding up strong and the labor market is holding tight.

The US Conference Board said on Tuesday that its consumer confidence index slipped to 135.1 this month from a slightly upwardly revised 135.8 in July. However, the survey’s present situation index rose to 177.2, the highest reading since November 2000.

Further, the Conference Board survey’s labor market differential jumped to 39.4 in August from 33.1 in July, indicating a potential drop in the jobless rate.