Shares fall as the bond market flashes a setback warning
The bond market smells like a recession.
Economic forecasters and Wall Street dealers have seen months since the yield on long-term US government bonds has fallen to interest rates on short-term debt.
Investors normally require higher returns to buy long-term bonds, and when long-term interest rates fall, it may signal a decline in economic growth.
In rare cases, long-term returns may actually fall below the yield on short-term bonds – a yield curve inversion in the market. Such unusual events have gone before any recession over the past 60 years.
And it happened on Friday.
The inversion followed a sharp decline in the return on long-term government bonds this week after the federal bank decided on Wednesday to leave the interest rate unchanged and signaled that it was not likely to raise interest rates by the end of 2019.
But A deal with financial data from In fact, Europe ran the measure in reverse territory. The yield on the 10-year government bond note tumbled to 2.45 per cent on Friday, its lowest level since January 2018 . It was just under 2.46 percent return on three-month state tax.
There are many different ways to measure the yield curve. On Wall Street, many analysts see the difference between the yields of two-year and 10-year government bonds which are not yet reversed.
However, research by the Federal Reserve Bank of San Francisco has mentioned the yield difference between three-month government bonds and 10-year government bonds – as vice versa – as the most reliable predictor of recession risk.
Traders on the stock market picked up on the downbeat signal. The S&P 500 had climbed despite a recent decline in bond yields, effectively reducing the downturn as evidence that the Fed would keep prices low for the foreseeable future. Keeping low prices has been a good thing for stocks over the past 10 years.
However, on Friday, S & P fell by 500 1.9 percent, as stock market investors were worried about the outlook for economic growth. It was the second worst drop for the market this year. Nasdaq's composite index fell 2.5 percent.
Experts in interpreting the predictable effect of the yield curve warned that a single day with a reversed yield curve does not necessarily mean that the economy will tip into recession.
Campbell Harvey, a finance doctor at Duke University whose research first showed predictive force of the mid-1980s yield curve, underlined that an inversion must last on average three months before it can be credibly said to send a clear signal. If that happens, the story shows that the economy will fall in a recession over the next nine to 18 months.
But even with the yield curve record to predict the downturn, Professor Harvey emphasized that there was no such thing as security in economic forecast.
"A model is just a model," he said. "It's not an oracle. It helps us forecast the future, but it can fail at all times."