Dow tumbles 800 points after bond market flashes a recession warning
New York (CNN Business) — The Dow fell 800 points Wednesday after the bond market, for the first time in over a decade, flashed a warning signal that has an eerily accurate track record for predicting recessions.
Here's what happened: The 10-year Treasury bond yield fell below 1.6% Wednesday morning, dropping just below the yield of the 2-year Treasury bond. It marked the first time since 2007 that 10-year bond yields fell below 2-year yields.
As the global economy sputters, investors are plowing money into long-term US bonds. The 30-year Treasury yield fell to 2.03%, the lowest rate on record.
Government bonds — particularly US Treasuries — are classic "safe-haven" assets that investors like to hold in their portfolios when they're nervous about the economy. Stocks, by contrast, are riskier assets that tend to be more volatile during economic slowdowns.
Here's what this all means: Normally, long-term bonds pay out more than short-term bonds because investors demand to be paid more to tie up their money for a long time. But that key "yield curve" inverted on Wednesday. That means investors are nervous about the near-term prospects for the US economy. Bonds and yields trade in opposite directions, so yields sink when investors buy bonds.
Part of the yield curve has been inverted for several months. In March, the yield on the 3-month Treasury bill rose above the rate on the 10-year Treasury note for the first time since 2007. It inverted again on July 24 and has remained negative. But Wednesday marked the first time in over a decade that the "main" yield curve — the 2-year / 10-year ratio — had inverted.
William Foster, Moody's lead US analyst, predicts the US economy will avoid a recession in 2019 and in 2020, despite the yield curve inversion's warning sign. He expects growth to slow in the second half this year into 2020.
The US economy remains strong: Unemployment is historically low, consumer spending is booming, and the financial system is healthy.