Influenced by the escalation of the Sino-US trade war, the long-term interest rate shown by the bond market has fallen to a deep trough. These rates are widely regarded as the most accurate predictors of future economic activity and inflation.
U.S. Treasury yields have plunged by 50 basis points over the past seven weeks, and German 10-year bond yields, already in negative territory, have hit record lows. Japan, Britain, Switzerland and France also have the lowest borrowing costs since 2016, and the financial market in 2016 was hit by a series of factors such as the unexpected referendum withdrawal from Europe by Britain and the slowdown of China's economy.
Economic recession is not inevitable. The bond market may have predicted this, but some other indicators, such as the stock market, are not so pessimistic. But trade tensions may make the current decline in bond yields different.
"We need to be careful," said Franck Dixmier, head of global fixed-income for Allianz Global Investment. The company manages assets of more than $560 billion.
"Experience tells us that bond markets are very good at predicting future economic trends, and the impact of a marked escalation of trade tensions is increasingly reflected."
Concerns about slowing economic growth or recession have led to a sharp decline in global inflation expectations in the future, when policy ammunition in the hands of major central banks is limited after years of ultra-loose monetary policy. Under the influence of British retreat, Britain is an exception.
The most obvious sign of the downturn in the outlook for economic growth comes from the U.S. Treasury yield curve -- the three-month and 10-year yield curves that are hanging upside down close to the worst level in the months preceding the global financial crisis in 2007.
The upside-down yield curve has proved to be a powerful indicator of economic recession.
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