The benchmark index wavered again on Wednesday: It was down as much as 1.1 per cent in midday trading, ending the day off 0.5 per cent as the inversion deepened amid the latest batch of discouraging global economic news.
The plunge was followed after the Fed announced that the difference in the spread between three-month treasury bills yield and a ten-year bond's yield came out to be negative. In the case yields continue lower, high-duration funds will likely do the best.
Behind this global scare was the inverted yield curve in the US.
"The U.S/ yield curve has inverted raising fears of a recession".
Germany's long-dated borrowing costs hit 2-1/2-year lows below zero percent. The US Federal Reserve warned that the US economy had slowed and said it would not raise interest rates this year. This development, known as "inversion" in bond market parlance, happened for the first time since 2007 on Friday.
"I'd be careful not to over-read or overreact in any moment to what markets are saying...because they have the ability to change on a dime", Kaplan said.
Fixed-income ETFs are in rally mode after a dovish Fed outlook and feeble European economic data pushed bond prices sharply higher and interest rates sharply lower. As Tom Stevenson says in The Daily Telegraph, the United Kingdom is now "cheaper, whatever your preferred measure might be", than Europe, the US, Japan and emerging markets.
U.S. economic growth could be "pretty weak" in the first quarter but will likely much closer to 2-2.5 per cent for the rest of the year, but a central bank pause is the responsible thing to do, Fed Bank of Boston president and CEO Eric Rosengren said at a conference in Hong Kong.
The dollar index, which measures the greenback against a basket of six major currencies, rose 0.24 percent, with the euro down 0.36 percent to $1.127.
The Fed Funds futures market is now fully pricing in a possible rate cut by year-end, and we expect that the 10-year U.S. Treasury yield will make a run for the 2.3 percent handle amid month/quarter-end re-positioning flows.
The US treasury department will sell $113bn in coupon-bearing supply this week, including $40bn in two-year notes on Tuesday, $41bn in five-year notes on Wednesday, and $32bn in seven-year notes on Thursday. These products won't decline almost as much if interest rates reverse course and they still offer relatively attractive yields.
"While dollar/yen hasn't fallen greatly and things aren't in panic mode, a sense of caution about where things are going has taken hold", said Shusuke Yamada, chief Japan currency and equity strategist at Bank Of America Merrill Lynch.
The British pound stood at $1.3211, erasing small gains made after lawmakers voted to wrest control of the Brexit process from Prime Minister Theresa May's government for a day.
Oil prices were volatile after government data showed US crude stocks unexpectedly rose last week, though disruptions to Venezuela's crude exports limited losses.
USA crude futures traded at US$59.26 per barrel, up three-quarters of a per cent on the day, a tad below Thursday's high of US$60.39, its highest since mid-November.
Gold retreated from the more than 3-week highs touched in the previous session.