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Bond market says a recession is coming and the Fed will cut rates

The bond market doubled to scary warnings Monday, signaling both a possible recession is threatening and the Fed had to lower interest rates this year to stop it.

00 points on both sides of unchanged Monday, but the bond market reflected a flight to security trading with the dividends across The curve from the shortest duration of securities to the longest, Dow ended 16 at 25,516, while S & P 500 fell 2 points to 2,798.

The speed was also global, with the German 10-year deposit falling to a negative 0.3

At the same time, there was plenty of action in bold futures futures, with traders betting at least a 25 basis point cut from the Federal Reserve this year and more than two by next year, a big change from the end of Last year, when the market was still expecting interest rate increases, and the Fed was predicting three.

On Friday, markets were spooked as the yield curve reversed, a reliable r ecession say gnal but usually not an instant. This means that the price of an instrument with a lower duration increased over a longer duration of the security yield. In this case, it was the yield on the 3-month bill, of 2.44 percent Monday, and moved over the 10-year dividend, which dropped as low as 2.38 percent, a more than 2 year low. The proceeds move the opposite price.

In another sign of fear, traders also on the 10-year dividend Monday when it slipped below 2.40 percent on where the feed fund is. The 2-year-old, at 2.24 percent, was well below this level.

"The decade is inverted relative to the current funds. It must signal expectations that rates will be lower in the future, which would be consistent with remarkable risk of a recession," says Jon Hill, US interest rate adjustment strategist at BMO. "One of the fascinating things is that the stock market is in conflict. The Fed is trying to extend this cycle as long as it can." If that is enough, it is hard to say. "

Source: Wilmington Trust

Hill said he believes some of the market moves Monday are about technical signals and short presses than real fear of recession Fed changed the tone of the markets significantly Wednesday as it was even more deaf than expected and lowered its forecast to just one for this year from 2.

Chicago Fed President Charles Evans was also added on the move, then He said Monday that the Fed could hold or even loosen the policy.

The Fed on Wednesday released a new forecast for no hikes this year from two earlier, but the market had already been priced at six basis points of ease this year. price in 19 additional base points or at least a 25 basis point cut this year, according to Hill.

"As for the recession, our economist feels quite optimistic that a recession will be avoided, at least this year. The market is not only focused on US fundamentals but also on what is happening in China, what is happening in the rest of the world and how likely it is that political uncertainty, whether through trade policy or how likely it is to continue and reach a recession, "says Mark Cabana, head of the USrate short-term strategy of Bank of America Merrill Lynch.

Strategists said the curve inversion does not necessarily mean that a recession is coming but it could. Also historically well done immediately after such a move.

"When recession signals begin to flash and recession probabilities increase, I would expect market participants and people using capital to become more cautious and there is a risk that It is self-fulfilling prophecies, said Cabana.

Brenner said that the 10-year yield comes before itself, but for the cold it is still lower. He said the market accounted for about $ 350 billion in new US debt this week in both notes and bills.

"We have the cheapest prices for a long time. You are in the last week of a quarter plus it's Japanese year end. All the things that affect it won't affect the next week," Brenner said.

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