Dow Crashes 660 Points as Bond Yield Inversion Ignites Wall Street Panic

Yield Curves Invert in U.S. U.K. as `Doom and Gloom' Spreads

Yield Curves Invert in U.S., U.K. as `Doom and Gloom' Spreads

Yields on 10-year US Treasury bonds dipped below the yield on the US 2-year bond Wednesday.

"We have seen stocks trading very poorly as a result of the yield curve inversion, so that will be flashing some additional warning lights for the Fed that they have to do more", said Andrea Iannelli, investment director at Fidelity International.

The Nikkei 225 index was down 1.93 percent or 398.51 points at 20,256.62 in early trade, while the broader Topix index dropped 2.01 percent or 30.14 points to 1,469.36.

The losses come a day after stocks rallied when the Trump administration delayed tariffs on about $160 billion in Chinese goods that were set to take effect on September 1. The Fed cut interest rates by 0.25% in July, its first rate cut in 11 years. In Germany, the 10-year bond yield fell to a record low of -0.64% after data showed the euro zone's powerhouse economy shrank in the second quarter.

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Nonetheless, despite soothing comments from lawmakers alongside fund managers, investors had fled equities to reach out for safe haven assets and government bonds on Wednesday (August 14th) after receiving a fresh signal of a recession in a near-term outlook. Stocks, on the other hand, are generally considered to be the riskier of the assets, as they are more vulnerability to the volatility of economic slowdowns. That's because investors want more compensation for locking up their money for a longer period of time, similar to how you can often get a better rate from your bank by putting money into a certificate of deposit than keeping it in your savings account. Unlike trade conflicts, an inverted yield curve by itself has limited economic impact.

After being hopeful earlier this year that a trade agreement may be imminent between the world's two largest economies, investors are increasingly digging in for the tensions to drag on for years.

The British yield curve also inverted.

Among the superlatives: the yield on 30-year Treasuries fell below 2 per cent for the first time and the world's pile of negative-yielding debt surpassed US$16 trillion.

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That metric reverted back and then inverted again in May.

Recessions could arrive within one or two years following the inverted yield curves, but some economists argue that the inverted yield curve may not necessarily mean recession is coming. The inversion of that curve has preceded every recession in modern history. But traders said the inversion would need to last a while to confirm the warning signal, and they pointed out that the widely followed gap between the two-year yield and the 10-year yield was still positive.

William Foster, Moody's lead USA analyst, predicts the United States economy will avoid a recession in 2019 and in 2020, despite the yield curve inversion's warning sign. Companies' reluctance to invest amid the uncertainty of the trade war, has already slowed growth. "Given the continued strong employment picture and healthy US consumer, there could still be time for this economic cycle to have plenty of life left".

"Even though we're discouraged by the yield curve's shape right now, we see few signs of danger ahead", said John Lynch, LPL Research chief investment strategist, in a blog post. The Dow gained 0.3%, to 25,543. This is because it depends on which points on the curve you've looked at to measure inversion.

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CMC Markets' analyst Margaret Yang said sentiment turned "extremely bearish" on the yield curve inversion, which is perceived to be a fairly reliable indicator of an upcoming economic recession.

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