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Aug. 14, 2019, 3:25 p.m. EDT

U.S. Treasury yields fall sharply, 2-year/10-year yield curve inverts, triggering recession indicator

U.S. Treasury 10-year note yield briefly fell before the 2-year note yield

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By Sunny Oh

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U.S. Treasury yields fell sharply on Wednesday after a raft of weak economic data from China and Germany underlined a slowdown in global growth, offsetting hopes that U.S.-China trade talks were making progress.

The sharp rally in long-term government bonds briefly inverted a key measure of the yield curve’s slope for the first time since June 2007.

How are Treasurys doing?

The 10-year Treasury note yield /zigman2/quotes/211347051/realtime BX:TMUBMUSD10Y -1.11%  plunged 8.2 basis points to 1.596%, its lowest since September 2016.

The 2-year note rate /zigman2/quotes/211347045/realtime BX:TMUBMUSD02Y -6.69%   retreated 7.5 basis points to 1.592%, while the 30-year bond yield /zigman2/quotes/211347052/realtime BX:TMUBMUSD30Y -0.63%   tumbled 9.3 basis points to 2.038%, an all-time closing low.

The spread between the 2-year note and the 10-year note temporarily fell to a negative 1 basis point. An inversion of this measure has often preceded an economic downturn. Investors say its powers as a recession indicator comes from its ability to reflect when tight monetary policy is capping growth and inflationary pressures.

See : The U.S. Treasury 2-10 year yield curve inverted and that means stocks are on ‘borrowed time,’ says BAML

What’s driving Treasurys?

The slowdown in China’s economy was highlighted by a rise in industrial production at its slowest pace since Jan. 2002, increasing 4.8% in July from a year earlier versus a 6.3% increase in June. Germany’s economy shrank 0.1% in the second quarter of 2019 as the U.S - China trade war hit global manufacturing supply lines and the country’s export-dependent industries.

See : What Germany’s dismal GDP number really means for Europe and interest rates

The raft of anemic data and the inversion of the U.S. yield curve weighed on investor sentiment, stirring demand for safe haven assets like Treasurys.

U.S. stocks saw a sharp selloff on Wednesday, with the S&P 500 /zigman2/quotes/210599714/realtime SPX +0.78%   and the Dow Jones Industrial Average /zigman2/quotes/210598065/realtime DJIA +0.68% on track to end lower by more than 2%.

The surge of economic pessimism comes only a day after the U.S. Trade Representative announced it would winnow down the list of goods that are set to incur a 10% tariff on additional $300 billion of Chinese imports, measures which were publicized earlier in August 1.

Read : Fed not on red-alert after yield-curve inversion

What did market participants’ say?

“When I look at the data from today, there’s nothing that justifies the [flight to safety] we are having. Perhaps it’s the cumulative effect of a lot of issues the market has been grappling with. We keep piling on more issues. There’s only so much markets can bear,” said Gautam Khanna, senior portfolio manager at Insight Investment.

“At the moment, investors think bonds are the safest way to protect their portfolio. And some think there’s another shoe to drop and a bigger correction in equities must be waiting around the corner,” Robert Robis, chief fixed income strategist at BCA Research, told MarketWatch.

What else is on investors’ radar?

In the U.K., the spread between the 2-year yield /zigman2/quotes/211347169/realtime BX:TMBMKGB-02Y 0.00%   and the 10-year yield /zigman2/quotes/211347177/realtime BX:TMBMKGB-10Y +1.93%   for British government debt, or gilts, also inverted alongside the U.S. Treasurys market.

add Add to watchlist BX:TMUBMUSD10Y
BX : Tullett Prebon
-0.0074 -1.11%
Volume: 0.00
July 8, 2020 10:58p
add Add to watchlist BX:TMUBMUSD02Y
BX : Tullett Prebon
-0.01 -6.69%
Volume: 0.00
July 8, 2020 10:58p
add Add to watchlist BX:TMUBMUSD30Y
BX : Tullett Prebon
-0.0088 -0.63%
Volume: 0.00
July 8, 2020 10:59p
+24.62 +0.78%
Volume: 2.39B
July 8, 2020 4:58p
US : Dow Jones Global
+177.10 +0.68%
Volume: 337.30M
July 8, 2020 4:58p
add Add to watchlist BX:TMBMKGB-02Y
BX : Tullett Prebon
0.00 0.00%
Volume: 0.00
July 8, 2020 5:01p
add Add to watchlist BX:TMBMKGB-10Y
BX : Tullett Prebon
+0.0035 +1.93%
Volume: 0.00
July 8, 2020 5:01p

Sunny Oh is a MarketWatch fixed-income reporter based in New York.

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