The following happened: The 10-year government bond yield fell to 1.677% Wednesday morning, below the 1.632% 2-year government bond yield. It was the first time since 2007 that 10-year bond yields fell below 2-year yields.
US stock futures fell as investors sold corporate shares and converted them into bonds. The Dow ( INDU ) was set to a 1.4% lower opening. The broader S & P 500 ( SPX ) fell by 1.4%, and Nasdaq ( COMP ) dropped 1.6% Wednesday morning.
As the global economy falter, investors plow money into long-term US bonds. The 30-year yield on government bonds fell to 2.06%, the lowest ever interest rate.
Government bonds ̵
1; especially US government bonds – are classic "safe havens" that investors like to keep in their portfolios if they are worried about the faint-hearted economy. In contrast, equities are riskier assets that tend to be more volatile during the economic downturn.
All this means that long-term bonds usually pay more than short-term bonds, as investors demand more money to hold their money for a long time. But this important "yield curve" has reversed on Wednesday. This means that investors are nervous about the short-term outlook for the US economy. Bonds and yields trade in opposite directions so that yields fall when investors buy bonds.
Part of the yield curve has been inverted for several months. In March, the yield of 3-month Treasury bills rose above the interest rate of the 10-year Treasury note for the first time since 2007. Wednesday, however, was the first time in over a decade that the "main" yield curve – the 2-year / 10-year relationship – had reversed.
This frightened Wall Street because every recession in modern history preceded a reversal of the 2/10-turn. However, this does not mean that a recession is imminent: the Great Recession began two full years after the yield curve was reversed in December 2005.