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The Bond Market Just Flashed This Nightmare Scenario Warning

Last Updated September 23, 2020 1:36 PM
Sam Bourgi
Last Updated September 23, 2020 1:36 PM
  • The benchmark 10-year Treasury yield plunged to record lows on Tuesday.
  • The yield curve inverted again, triggering fears of a looming recession.
  • Stock markets are plunging again, with the Dow Jones Industrial Average falling as much as 400 points.

America’s bond market flashed another ominous warning sign on Tuesday, as long-dated Treasury yields plunged below their short-term equivalents in what has become the steepest inversion since October .

In other words, investors are flocking to government bonds to shield against economic misery – triggering the market’s most feared recession indicator.

Yield Curve Inverts Again

Bond yields are in free fall this week, as investors began pricing in the impact of coronavirus on global economic growth.

The yield on the benchmark 10-year Treasury note fell about 5 basis points to 1.32%, a new record low. Bond yields move inversely to price.

10 year Treasury yield
The 10-year Treasury yield has been in free fall the past year. | Chart: CNBC 

The 10-year Treasury yield has fallen more than 20 basis points over the past five days. This time last year, the 10-year Treasury note yielded more than 2.60%.

Meanwhile, the yield on 3-month T-bill was little changed at 1.54%.

This startling inversion between the 10-year and 3-month yields is a strong sign investors are starting to factor global economic health in their decision-making. When the yield curve inverts, an economic downturn usually follows. The timing varies, but researchers say it takes about two years for recession to hit after a major yield-curve inversion.

As bond yields fell, so did stocks. The Dow Jones Industrial Average fell by as much as 400 points Tuesday, extending its 1,000-point slide from Monday.

Threat of Global Recession Grows

Investors are flocking to government bonds because coronavirus appears to be much worse than Chinese authorities initially let on. This shocking admission was made recently by Chinese President Xi Jinping, who described coronavirus as a public health crisis.

The spread of the disease has stunted Chinese economic growth, resulting in a steep drop in energy demand. The International Energy Agency says demand for oil has declined across the globe , not just in China, with factory shutdowns impacting supply chains in various industries.

With infections surging across South Korea, Italy and Iran, the possibility of global recession is growing by the day. Using the 2003 SARS pandemic as a baseline, coronavirus could cost the global economy trillions in lost productivity and consumption. According to a MarketWatch op-ed by Rex Nutting , “global recession is almost certain” if the virus isn’t contained.

A recent update from the World Economic Forum  pegs manufacturing, pharmaceuticals, airlines and travel and tourism industries to be among the hardest hit due to coronavirus.