Bond Market Reflects Recession Worries

Wall Street saw a bit of a sharp decline mid-week on the heels of recession fears with the US Treasury yield curve inverted—albeit temporarily—for the first time in 12 years. Accordingly, all three major indexes in the United States stock market closed down approximately 3 percent; the blue-chip Dow Jones Industrial, specifically, saw its biggest single-day point drop since October.  A big recession signal, here, was the value of 2-year Treasury yields surpassing the value of 10-year bonds. 

With strained economic data coming out of China and Germany, economists around the world now worry about a similar strain on the global economy. Unfortunately, this will only continue to worsen should the US-China trade war continue to escalate. 

Indeed, all of this serves to explain that the 10-year Treasury bond yield slipped lower than 1.6 percent by Wednesday morning. That is just short of the 2-year Treasury bond yield; the first time since 2007.  This pushed the Dow down 800 points ahead of recession concerns.  

And while analysts concerns are certainly worth heeding, moves in the stock market—from investors—tend to tell a more concrete story.  In this case, investors are definitely in agreement with analysts as US stocks fell across the board.  Investors sold stocks that ultimately dragged on every index. Again, the Dow fell more than 800 points—down about 3.1 percent—by close of day.  The Standard & Poors 500—a far more broad index—was also down nearly 3 percent. The same could also be said about the tech-heavy Nasdaq Composite.  

Overall, this is the worst day for the stock market this year.

All of this serves to explain why the bond market is heating up.  In general, government bonds—and US Treasuries, in particualr—are considered a classic “safe-haven” asset that investors prefer to diversify their portfolios.  This diversification comes in quite handy when economic uncertainty grows among investors.  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. 

Now, although these concerns are growing it is important to remember that the US economy is actually pretty strong. Unemployment is hovering around historic lows and consumer spending is dramatically higher.