August 15, 2019
The yield on the benchmark 10-year U.S. Treasury note briefly dipped below the yield on the 2-year Treasury for the first time since 2007 on Wednesday. That inversion confirmed a fear for many observers that financial markets are signaling recession is coming for the U.S., even as the global economy weakens, and a trade war between the U.S. and China intensifies.
The shift raises questions about the strength of the U.S. economy. And it causes economists to ponder if the curtains are finally starting to come down on the longest U.S. expansion on record that has spanned 10 years.
When longer-term Treasurys pay less than shorter-term Treasurys, it suggests that bond investors expect a slowdown, which will result in the Federal Reserve to react by slashing short-term rates in an effort to shore up the economy.
The reason yield curve inversions are so closely watched is because they have proven to be an accurate indicator of a coming recession. They serve as a sign of economic pessimism, and have preceded each of the past five downturns. Though experts point out on average, downturns don’t happen for two years following an inversion.
The Dow Jones tumbled 800 points, or 3% on Wednesday, following reports of the inversion.
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