While we trade in share market, we observed most often market fall for various reasons, among those reasons some are attributable to the domestic reasons and some to international reasons and few are just random reasons. That is how the market goes.
You must have observed that on 22nd March 2019 and 25th March 2019 market fell down and it was attributed to an interesting international situation.
On March 22, the US 10-year treasury yields slipped 10 basis points
(bps) to 2.44 per cent, lower than the 2.46 per cent yields on
three-month Treasury bill. This development, known as “inversion” in bond market parlance, happened for the first time since 2007 on Friday.....(more here)
We all knows that every Government issues Government Bonds to fund their projects and capital expenditures. The tenure of such bonds can be from 91 days to 10 years. Now we have to think about it, 10 years is a very long period, specially in the backdrop of the risky and volatile capital markets. Given this, if you ware to hold a bond for 10 long years, then you would expect to be adequately compensated in terms of the return you make on these bonds, also known as the bond yield. Going by the same argument, you would have much lesser expectation from a short term instrument, say 91 days bills.
So all else equal, the long term bonds is supposed to offer a better rate compared to short term bills.
But what happens, if it's the other way round? Meaning 10 years bonds yield drops below the short term one? This implies the markets anticipated a spike in the risk factors concerning the 10-Years bond. This could mainly be concerning the broader economy and impending recession. this is when traders dump long term bonds, which drives the yield lower than short term bonds.
We may call this "Inversion", in the fixed income world and this is planning out in the US market.
Equity market don't really like the inversion in the bond markets as it indicates a bad time ahead. Hence accordingly our marked did what they like.
Tags
Technical