By William Watts, MarketWatch
The bond market sent a warning, and this time the stock market listened. Investors will be looking for clues in the week ahead that policy makers are listening, too.
The yield on the 10-year U.S. Treasury note on Wednesday briefly traded below the yield on the 2-year note, marking an inversion of the yield curve — a phenomenon seen as an often reliable recession indicator, albeit with an average lag of more than a year. In fact, the 10-year yield has traded below the 3-month T-bill yield since late May — an inversion of that portion of the curve is seen by economists as an even more reliable recession indicator.
But the latest twist came amid a run of downbeat economic data out of Asia and Europe, as well as an intensifying U.S.-China trade war.
‘Headline warning shot’
The latest inversion doesn’t guarantee doom, but it is “a headline warning shot about what’s been going on over the last few months,” said Joe Mallen, chief investment officer at Helios Asset Management, which manages $16 billion in combined adviser assets, in an interview.
“At a very high level, people are really now genuinely concerned about a recession in the U.S. in the next two years, and I think that’s fair,” he said.
It was a volatile week for the stock market. The Dow Jones Industrial Average /zigman2/quotes/210598065/realtime DJIA +1.01% slumped 800 points, or 3.1%, on Wednesday for its biggest one-day percentage fall of 2019, while the S&P 500 /zigman2/quotes/210599714/realtime SPX +1.44% tumbled 2.9% in the inversion-inspired selloff. Equities ended mostly higher Thursday and then reclaimed a sizable chunk of ground Friday, but still ended lower for the week. The S&P 500 saw a 1% weekly decline, while the Dow fell 1.5% and the Nadsaq Composite /zigman2/quotes/210598365/realtime COMP +2.13% was down 0.8%.
Stock-index futures pointed to a higher start Monday, buoyed by upbeat comments by President Donald Trump on trade talks, along with a move by China over the weekend to lower borrowing costs for companies.
The 10-year/2-year measure of the curve ended the week with a small upward slope after Wednesday’s brief inversion. But stock-market investors were also spooked by the size and speed of the rally in Treasurys, a popular haven during periods of uncertainty. Yields, which move the opposite direction of bond prices, fell sharply to multiyear lows or, in the case of the 30-year Treasury bond /zigman2/quotes/211347052/realtime BX:TMUBMUSD30Y +2.87% , an all-time low, dipping below 2% for the first time ever before ending the week at 2.001%.
A global story
Of course, the moves in the Treasury market aren’t all — or perhaps even mostly — about the U.S. economy. That speaks to ideas the Treasury rally is overdone, and vulnerable to a pullback that could see yields rebound in the near term.
“The bond market rally is as much a global story as a U.S. one,” said Kit Juckes, global macro strategist at Société Générale, in a Thursday note, observing that weak data in Asia and Europe were the culprits in sparking the Treasury rally that dragged down yields on Wednesday. “But at some point, U.S. data need to justify the fall in U.S. yields, or at least a bigger part of them than recent data have.”
The burgeoning supply of debt around the world that offer negative yields — the entire German government bond yield curve is now in subzero territory — means Treasurys remain attractive, even if their yields are near or at all-time lows.