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US yield curve hits flattest level in more than 12 years

New York

THE US Treasury yield curve hit its flattest level in more than 12 years on Tuesday, suggesting increased market anxiety over the state of the economy amid trade war concerns and global political tensions.

The spread between US two-year and 10-year note yields, a closely watched metric for recession signals, declined to 0.6 basis point, the narrowest since June 2007, according to Refinitiv data. The last time this yield curve inverted was also in June 2007 in the midst of the US sub-prime mortgage crisis.

"I wouldn't say an inversion is a convincing recession signal as in previous cycles and decades because there's so much central bank manipulation of the yield curve," said John Hermann, rates strategist, at MUFG Securities in New York.

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"The fact that the yield curve was so flat and could possibly invert means that the US economy is growing at or below trend, the risks are to the downside, and that the inflation mandate won't be achieved," he said.

Despite weak signals from the yield curve, US yields rose across the board on Tuesday after the Trump administration delayed imposing a 10 per cent import tariff on laptops, cellphones, video game consoles and a wide range of other products made in China.

Analysts said the US move served to ease trade tensions between the two world's largest economies, at least for now.

US two-year and 10-year note yields hit session highs after the trade news, while those on 30-year bonds rallied from more than three-year lows. Traders earlier were bracing for 30-year yields sinking to a record low below 2.08 per cent.

The US tariffs had been scheduled to start next month. The US Trade Representative's Office action was published just minutes after China's Ministry of Commerce said Vice- Premier Liu had a phone conversation with US trade officials.

"It's overall trade optimism for global markets," said Justin Lederer, Treasury trader at Cantor Fitzgerald in New York.

That said, market sentiment remained cautious overall.

Tuesday's data showing a pickup in US inflation in July earlier pushed yields slightly higher. Analysts said the higher inflation was a positive sign for the US economy, but was likely not enough to deter the Federal Reserve from cutting interest rates at the next policy meeting in September.

The Labor Department said the US consumer price index climbed 0.3 per cent last month, lifted by gains in the cost of energy products and a range of other goods.

Excluding the volatile food and energy components, the CPI gained 0.3 per cent after rising by the same margin in June.

"I really think we need to see a string of stronger inflation data before we see a mutual change in sentiment," said Bill Merz, director of fixed income at US Bank Wealth Management in Minneapolis.

In afternoon trading, US benchmark 10-year Treasury note yields rose to 1.681 per cent from 1.64 per cent late on Monday.

Yields on 30-year bonds advanced to 2.14 per cent from 2.13 per cent on Monday. Thirty-year yields earlier hit 2.097 per cent, their lowest level since July 2016.

At the short end of the curve, US two-year yields rose to 1.666 per cent from Monday's 1.58 per cent. REUTERS