Thursday , August 22 2019
Home / unitedstates / Dow will collapse after warnings about recession in the bond market

Dow will collapse after warnings about recession in the bond market



Here's what happened: 10-year government bond yields fell to 1.627% on Wednesday morning, below 1.632% 2-year government bond yields. This meant for the first time since 2007 that 10Y bond yields fell below 2Y yields.
US stock futures fell when investors sold company shares and transferred them to bonds. The dow (INDU) was set to open by about 1.4% less. wider S&P 500 (SPX) futures contracts fell by 1.4% and Nasdaq (COMP) Futures fell on Wednesday morning by 1.6%

As the global economy breaks down, investors invest money in long-term US bonds. The profitability of the 30-year Treasury fell to 2.06%, the lowest level in history.

Government bonds – in particular US Treasury bonds – are classic safe harbor assets that investors like to have in their portfolios when they are worried about the economy. In contrast, stocks are more risky assets that are usually more volatile during an economic downturn.

Here's what it all means: Typically, long-term bonds pay more than short-term bonds, because investors demand more money to tie their money for a long time. But this key "yield curve" reversed on Wednesday. This means that investors are afraid of short-term prospects for the US economy. Bonds and income go in opposite directions, so income decreases when investors buy bonds.

Part of the yield curve was reversed for several months. In March, for the first time since 2007, the profitability of a 3-month treasury bill exceeded the rate of a 10-year treasury bill. But on Wednesday, for the first time in more than a decade, the "main" yield curve – 2 year / 10 years ratio – reversed.

This frightened Wall Street because the reversal of the 2/10 curve preceded every recession in modern history. This does not mean, however, that the recession is imminent: The great recession began two full years after the reversal of the yield curve in December 2005.

Source link