Macro Digest: New lows in US yield indicate rising recession risk Macro Digest: New lows in US yield indicate rising recession risk Macro Digest: New lows in US yield indicate rising recession risk

Macro Digest: New lows in US yield indicate rising recession risk

Steen Jakobsen

Chief Investment Officer

Summary:  ​Low in 30Y US yield & 2Y US yield > 30Y yield = Global recession risk 

Updated August 15 for clarity and minor text edits

The probability of the Fed cutting rates, even inter-meeting, is rising significantly as a recession is more and more likely and recessions mean an average sell-off in equities of at least 25%.

Policy Response?

  • The Fed needs to cut 50 bps and soon – maybe even inter-meeting
  • The Fed is behind and has been since last September – to get ahead the Fed needs to cut more than the Fed near-term premium (3 month expected Fed rate less the 18 month expected Fed rate indicates: - 60 bps presently – this needs to shift back higher, meaning the Fed will need to cut more now rather than later - perhaps 100 bps through the December FOMC meeting to start getting there - now only around 70 bps of cuts priced
  • An active weaker US Dollar policy is only week away – watch very closely as FX war starts its big engines

What to do?

  • Long GOLD – negative yield feeds both “official buying” and hedge buying: 1600 $ and then 1700 $ target
  • Underweight equity
  • Hedge long risk with long JPY, gold, short-term bonds
  • Keep a close eye on credit spreads which should widen (fall in price) :  EUR High Yield & US High Yield


On the day that German GDP went negative, the world biggest exporter - The world biggest importer: The US saw new all time lows in long-term yield – Random? Hardly

The Fed is behind the curve and has been since last September – their speed reduced by their fundamental belief in inflation targeting (and that the present weakness is transitory) – and now into a macro context they call: Regret Analysis. Sad state of affairs, but the main point being G-7 central bank lost their ability to change direction of growth – end of story.

Despite this they will give it another try – i.e. force rates down again. The only way to “move” market now in my opinion being a rate cut between scheduled meetings to force the front end lower, faster. Rip off the band aid rather than taking it slowly!

Also note that everything is unfolding in the context of falling international cooperation – read: G7 – the odds of a full foreign exchange war as an extension to trade policy spats is more than 50/50 now. The main policy choice will likely be a very aggressive rhetoric talking down the US Dollar followed by Fed cuts.

Source: Bloomberg

Trend is clear: by Q4-2020 the entire US yield curve will be negative?

Source: Bloomberg

Yield curves screaming recession!  2yr-10yr and Fed near-term premium (3 month Fed policy rate less versus 18 month policy rate)

Source: Bloomberg

Boulevard Plaza, Tower 1, 30th floor, office 3002
Downtown, P.O. Box 33641 Dubai, UAE

Contact Saxo

Select region


Trade responsibly
All trading carries risk. Read more. To help you understand the risks involved we have put together a series of Key Information Documents (KIDs) highlighting the risks and rewards related to each product. Read more

Saxo Bank A/S is licensed by the Danish Financial Supervisory Authority and operates in the UAE under a representative office license issued by the Central bank of the UAE.

The content and material made available on this website and the linked sites are provided by Saxo Bank A/S. It is the sole responsibility of the recipient to ascertain the terms of and comply with any local laws or regulation to which they are subject.

The UAE Representative Office of Saxo Bank A/S markets the Saxo Bank A/S trading platform and the products offered by Saxo Bank A/S.