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Inverted yield curve fuels fear for potential economic recession


Traders and financial professionals work on the floor of the New York Stock Exchange on Tuesday. (Drew Angerer/Getty Images)

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.”

“The yield curves are crying timber that a recession is almost a reality, and investors are tripping over themselves to get out of the way,” he added.

The most recent inversion began in December 2005, about two years before the Great Recession made landfall. The phenomenon similarly came before the last nine recessions dating as far back as 1955.

Experts noted however, that an inversion does not imply a recession is inevitable — it occurred in 1966, but the market managed to recover.

Recessions typically occur some 18 to 24 months after the yield curve inverts though it can take months and sometimes years for economists to link the two events.

With News Wire Services