Inverted yield curve fuels fear for potential economic recession
Stocks tumbled Wednesday morning as the bond market raised a big red flag for the U.S. economy Wednesday morning with an inverted yield curve, which has sparked fear over a possible recession that could come within the next two years.
The yields on 10-year U.S. Treasury bonds dipped below the yield on 2-year bonds around 6 a.m., marking the first time such a long-term bond has eclipsed its shorter term counterpart since just before the Great Recession in 2007.
The news hit hard on Wall Street — by noon the Dow 650 points, the S&P dropped 2,5% and the Nasdaq dipped even further, down 2.9 %. The huge drop comes just a day after the market achieved it best performance in months.
The yield on a 10-year Treasury note hit 1.622% on Wednesday, dropping just below the yield of a 2-year, which stood at around 1.634%. The occurrence suggests investors’ faith in the economy is wavering — a sign that has preceded every recession in the last 50 years.
Historically, people purchase government bonds and anticipate interest payments in return for lending money. Investors typically expect to get a higher return when they lend the funds for a longer period as it requires more risk — but those pouring finances into safer and shorter investments has seemingly driven down the return rates of pay.
Investors’ concern could be traced to anxiety over rocky relations between the United States and China amid President Trump’s trade war.
Germany on Wednesday also announced its economy had shrunk, blaming the fallout from the U.S.-China trade war as well as the potential for a hard Brexit. China similarly reported signs of a weakening economy, including high unemployment and lower production and investment markers.
Chris Rupkey, chief financial economist at MUFG Union Bank, told the Washington Post that “the stars are aligned across the curve that the economy is headed for a big fall.”