The Dow Jones Industrial Average opened down more than 400 points on Wednesday after the bond market gave investors a very historically reliable bearish signal.
For the first time since 2007, the yield on the 10-year Treasury note fell below the yield on 2-year Treasury notes on Wednesday morning. Yield curve inversion has previously been a reliable leading indicator of a U.S. economic recession.
According to the San Francisco Fed, each of the nine U.S. recessions that have occurred since 1955 came between six months and 24 months after an inversion in the yield curve of two-year and 10-year Treasury yields. Investors have been watching the bond market closely for potential inversion of these key yields since the yield on the 10-year Treasury note fell below the yield on 3-month Treasury bills back in March.
The curve inversion came just one day after the U.S. market gained major traction thanks to news from the U.S. Trade Representative would be postponing new 10% tariffs on certain Chinese imports, including cell phones, until Dec. 15. Still, concerns over the impact of China’s currency devaluation, as well as geopolitical instability in Hong Kong and Argentina have investors worried that a global economic downturn could drag down the U.S. economy as well.
Why It's Important
The 10-year Treasury yield fell to just 1.608% on Wednesday, well below the Fed funds effective rate of 2.12%. The Fed cut interest rates by 0.25% in July, its first rate cut in 11 years. According to CME Group, the chances of at least one more Federal Reserve rate cut in 2019 have risen from 89.1% one month ago to 100% today.
Last week, U.S. President Donald Trump once again blamed the Federal Reserve for keeping interest rates too high and making it difficult for U.S. companies to compete internationally.
"They have called it wrong at every step of the way, and we are still winning. Can you imagine what would happen if they actually called it right?” Trump said of the Fed.
Trump’s critics have blamed slowing U.S. growth on the ongoing trade war with China, and the Fed mentioned “global developments” as a justification for its rate cut.
The U.S. isn’t the only major country suffering from falling yields. In fact, there is now more than $15 trillion in global government debt with negative yields, according to the Wall Street Journal.
Investors will continue to monitor trade war developments between the U.S. and China in the coming weeks and months. On Tuesday, China’s Vice Premier Liu He and U.S. Trade Representative Robert Lighthizer and Treasury Secretary Steven Mnuchin spoke on the phone and agreed to talk again in two weeks.
The SPDR S&P 500 ETF Trust SPY traded lower by 1.2% Wednesday morning. The iShares Barclays 20+ Yr Treas.Bond TLT was up 1.6%.
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