Dow Jones plummets 800 points as bond markets signal looming recession

Typically, investors demand higher yields, or returns on the money they put in, for longer-term bonds than for their short-term counterparts since short-term economic conditions are easier to predict. On a graph, that’s depicted as a curve, with the yield gradually rising over time.

Reversals of the curve in the past, so that the yield declines over time, have been a reliable indicator of recessions for economists, and the curve representing three-year and five-year U.S. Treasuries inverted Monday for the first time in more than a decade as Washington and China failed to send a coordinated messages about the terms of a 90-day cease-fire in trade hostilities.

At the same time, the more widely followed curve for 2-year and 10-year Treasuries flattened — a precursor to inverting — to the lowest since 2007, when the global economy was spiraling toward a financial crisis that would wipe out trillions of dollars in market value and push U.S. unemployment to 10 percent.

Still, the U.S. economy remains strong at present, with annual growth poised to top 3 percent and unemployment at a near 50-year low of 3.7 percent, and analysts at Swiss lender UBS cautioned against “reading too much” into the inverted curve.

U.S. markets have experienced widening bouts of volatility throughout the year as President Trump’s tariffs on allies and competitors alike raised concerns that global growth would be undermined, and interest-rate increases by the Federal Reserve prompted corporate executives to grow more cautious about spending.

The central bank has raised rates three times in 2018, to a range of 2 percent to 2.25 percent, and is poised for another increase this month.

“Economic cycles are often ended by central banks over-tightening, but over the last week, this risk appears to have receded,” Vincent Heaney of UBS’s chief investment office, said in a note to clients. “We do not believe the slight mid-curve inversion indicates an approaching recession.”

While the U.S. agreement to hold talks with China before raising tariffs beyond current levels on $250 billion of the country’s goods was a tentative buoy for markets on Monday, Trump administration officials have contradicted each other on the terms. Trump’s statement on Twitter that Beijing agreed to remove a retaliatory duty on U.S. automobile shipments hasn’t been backed up Chinese President Xi Jinping’s government.

And while Trump himself told reporters Sunday that if his negotiations with Xi yield an agreement, “it goes down as one of the largest deals ever made,” he reiterated Tuesday on Twitter that nothing is written in stone.

“President Xi and I want this deal to happen, and it probably will,” he wrote. “But if not remember, I am a tariff man. When people or countries come in to raid the great wealth of our nation, I want them to pay for the privilege of doing so. It will always be the best way to max out our economic power.”