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Dow set to tumble after recession flashes in bond market



This happened: The 10-year government bond yield fell to 1.627% Wednesday morning, below the 1.632% yield on the 2-year government bond. It marked the first time since 2007 that 10-year bond yields fell below 2-year yields.
US stock futures fell as investors sold shares in companies and moved them into bonds. Dow ( INDU ) was set to open about 1.4% lower. The wider S&P 500 ( SPX ) futures was down 1.4% and Nasdaq ( COMP ) futures fell 1.6% Wednesday morning.

While the world economy is spinning, investors are plowing money into long-term US bonds. The 30-year government rate fell to 2.06%, the lowest rate on the record.

Government bonds ̵

1; especially US government bonds – are classic "safe-haven" assets that investors like to have in their portfolios when they are nervous about finances. Stocks, on the other hand, are riskier assets that tend to be more unstable during economic downturns.

This means everything: Long-term bonds usually pay more than short-term bonds because investors demand more pay to tie up their money for a long time. But that key "yield curve" turned Wednesday. That means investors are nervous about the long-term outlook for the US economy. Bonds and interest rates act in the opposite direction, so returns decrease when investors buy bonds.

Part of the yield curve has been reversed for several months. In March, the return on the 3-month Treasury rose above the yield on the 10-year Treasury for the first time since 2007. But Wednesday marked the first time in more than ten years that the "most important" yield curve – the 2-year / 10-year ratio – had turned.

It made Wall Street known because an inversion of the 2/10 curve has preceded any recession in modern history. That does not mean that a recession is imminent, but: The Great Recession began two full years after the inversion of the yield curve in December 2005.

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