By clicking through to the Adviser content within, you confirm that you are a licensed adviser operating under an Australian Financial Services License.

I'm an Adviser

I'm not an Adviser

Inverted US yield curve and falls in equity markets

The US yield curve has inverted between 2 and 10 years, which has been the catalyst to the latest equity market correction. This takes place in an environment of slower global economic growth and escalating geopolitical uncertainty.

What happened?

  • The US yield curve inverted between 2 and 10 years. That is, the US Treasury 10 years yield was lower than the US Treasury 2 years yield. This negative slope of the yield curve was a modest 2 basis points at the end of trading yesterday (15 August). An inverted yield curve is an important event as historically, it has been a very reliable indicator of an impending recession. History tells us that once the 2s-10s curve inverts, on average a recession is approximately 12 to 18 months away.
  • Markets were alarmed by a number of disappointing economic data released yesterday. German June quarter GDP shrunk by 0.1% and Chinese June industrial growth (4.8%) was at its lowest level since February 2002.
  • While the inversion of the US yield curve is the catalyst to the latest equity market correction, this takes place in an environment of slower global economic growth and escalating geopolitical uncertainty.


  • US equity markets fell sharply over night (14 August). The S&P 500 Index fell by 2.93%, the Dow Jones Industrial Average fell by 3.05% and the NASDAQ fell by 3.02%. US equity indices recovered modestly in trading on 15 August.
  • Equity markets in Asia Pacific have also fallen in trading today (15 August). The ASX 300 Index fell by 2.67%, the Nikkei Index by 1.29%. Surprisingly, the Hang Seng has bucked the global trend and rose by 0.76%.
  • Long maturity bond yields in the main developed markets have fallen dramatically over the past 12 months: US 10 years bond yield has fallen to 1.51% from 2.86%, Australia 10 years bond yield is now at 0.86%, down from 2.57%.
  • The AUD is currently trading at around 0.677 USD.


  • The inversion of the US yield curve reflected investors’ concerns about the slowdown in global economy. In summary, the three largest European economies (Germany, Italy and France) have all seen economic slowdown. The outlook for the Chinese economy is clouded by the escalating trade tension with the US. In addition, the Chinese government has not stimulated the economy as aggressively as some investors had hoped due to concerns about high level of indebtness in the economy.
  • The US economy is in a more solid position, at least relative to the other major economies. While US economic growth has moderated since the start of 2019, the level of unemployment remains very low and inflation, while accelerating, remains under control. The benefits from the Federal Reserve’s pivoting from a tightening monetary policy to a more accommodative policy stance are yet to flow through to the real economy.
  • It is too early to predict a recession in the US over the next 12 to 18 months with certainty. The Federal Reserve is in a better position, compared to the European Central Bank or the Bank of Japan, to provide the necessary support to the economy due to the simple fact that the US still has positive bond yield! In fact, unstable financial markets may lead the Federal Reserve to ease monetary policy more aggressively.
  • It is important to note that the recent sharp fall in 10 years US Treasury yield cannot be explained by economic fundamentals alone. There is a sharp rise in investors’ risk aversion and US government bonds, as a safe haven asset, benefited from this shift in investor sentiment.
  • Geopolitical events play a role in the shift in investor sentiment. The main geopolitical uncertainty and risk to the global economy remain the US China trade dispute. Ironically, the US announced on the morning of 13 August that the proposed 10% tariffs on USD 300 billion imports from China will be delayed until 15 December for some items. Those items are mainly consumer goods (mobile phones, laptops and toys) and total around USD 150 billion. This positive development seems to have been overwhelmed by other geopolitical developments including: 1) the deterioration of the political situation in Hong Kong; 2) the increasing likelihood of a ‘Hard Brexit’.
  • In summary, the possibility of a US recession has increased recently, but it’s not a certainty. This partly reflects geopolitical tensions which pose significant risks to the global economy. Investors can expect further volatility in equity markets given that many of the geopolitical uncertainties are unlikely to be resolved quickly.

Written by George Lin, Senior Investment Management, Colonial First State

Adviser use only

Unless otherwise specified, this document has been prepared by Colonial First State Investments Limited ABN 98 002 348 352, AFS Licence 232468 (Colonial First State) based on its understanding of current regulatory requirements and laws as at the date of publication. While all care has been taken in the preparation of this document (using sources believed to be reliable and accurate), to the maximum extent permitted by law, no person including Colonial First State or any member of the Commonwealth Bank group of companies, accepts responsibility for any loss suffered by any person arising from reliance on this information. Colonial First State is the issuer of interests in FirstChoice Personal Super, FirstChoice Wholesale Personal Super, FirstChoice Pension, FirstChoice Wholesale Pension, FirstChoice Employer Super offered from the Colonial First State FirstChoice Superannuation Trust ABN 26 458 298 557. It also issues interests in the Rollover & Superannuation Fund (ROSCO) and Personal Pension Plan (PPP) offered from the Colonial First State Rollover & Superannuation Fund ABN 88 854 638 840. Colonial First State also issues other investment products made available under FirstChoice Investments and FirstChoice Wholesale Investments, other than FirstRate Saver, FirstRate Term Deposits and FirstRate Investment Deposits which are products of the Commonwealth Bank of Australia ABN 48 123 123 124, AFS Licence 234945 (the Bank). Colonial First State is a wholly owned subsidiary of the Bank. The Bank and its subsidiaries do not guarantee the performance of FirstChoice products or the repayment of capital from any investments. This document provides information for the adviser only and is not to be handed on to any investor. It does not take into account any person’s individual objectives, financial situation or needs. You should read the relevant Product Disclosure Statement (PDS) before making any recommendations to a client. Clients should read the PDS before making an investment decision and consider talking to a financial adviser. PDSs can be obtained from or by calling us on 13 18 36.


From time to time, Colonial First State enters into alliance partnerships with dedicated and experienced investment specialists. Each alliance represents an agreement for Colonial First State to provide third party distribution services within the Australian Financial Services intermediary market.


Past performance is no indication of future performance.


Stocks and investment options mentioned are for illustrative purposes only and are not recommendations to any person to buy sell or hold these stocks.


Taxation considerations are general and based on present taxation laws and may be subject to change. Clients should seek independent, professional tax advice before making any decision based on this information. Colonial First State is also not a registered tax (financial) adviser under the Tax Agent Services Act 2009 and clients should seek tax advice from a registered tax agent or a registered tax (financial) adviser if they intend to rely on this information to satisfy the liabilities or obligations or claim entitlements that arise, or could arise, under a taxation law.

Contact us