Investors should be wary of yield curve inversion - a key signal of recession

MUCH of Wall Street's equity market volatility this year has been attributed to falls in the US bond market, where worries over rising inflationary pressures in an economy enjoying near-full employment have pushed yields gradually higher.

The first major blowout was on Feb 2, when sudden worries that the US Federal Reserve might raise interest rates more aggressively than expected sent the 10-year Treasury yield to a then-four year high of 2.85 per cent and cut 2.5 per cent off the major equity indices.

Since then, analysts have kept a keen eye on the 10-year bond, highlighting the importance of the "psychologically important" 3 per cent level. Between February and mid-May, the yield climbed above that twice more, the most recent being on May 17, when it peaked at 3.115 per cent. Less discussed, however, is that shorter yields have been rising sharply and that the gap between long and short rates has been progressively narrowing - on May 17, the two-year Treasury yield closed at 2.598 per cent, the highest since August 2008. The five-year bond in the meantime, offered a yield of 2.957 per cent, a nine-year high.