The U.S. Treasury yield curve temporarily inverted on Wednesday, with two-year note yields exceeding 10-year yields, signaling growing concerns over a recession in the world's biggest economy.
The inversion, which happened for the first time since June 2007, is widely viewed as an indicator for a looming recession. In the past 50 years, the curve has inverted before every recession.
The benchmark 10-year Treasury note yield fell below 1.6 percent on Wednesday. Earlier in the day, the yield was briefly below that of the two-year Treasury note. Rattled investors then rushed to long-term safe haven assets, pushing the benchmark 30-year Treasury yield to a record low.
"You have a little bit of panic going on here about the state of the economy and the bond market is reflecting that," Richard Bernstein, founder of investment firm RBAdvisors, was quoted by the POLITICO as saying.
The alarming signal in the bond market helped drive the Dow Jones Industrial Average down some 800 points, or 3 percent, as investors suffered their worst day of the year. The S&P 500 and Nasdaq Composite also saw similar declines.
U.S. economic growth slowed to 2.1 percent in the second quarter of this year, marking a sharp slowdown from the 3.1-percent expansion in the previous quarter. Despite strong job growth and solid consumer spending, manufacturing output has declined for two consecutive quarters, and business fixed investment fell in the second quarter.
U.S. Federal Reserve recently lowered interest rates for the first time since the 2008 global financial crisis, amid rising concerns over trade tensions, a slowing global economy and muted inflation pressures.
President Donald Trump has repeatedly blamed the Fed for impeding economic growth, urging the central bank to cut its benchmark federal funds rate in recent months. "CRAZY INVERTED YIELD CURVE!" Trump tweeted Wednesday. "We should easily be reaping big rewards & gains, but the Fed is holding us back."
The editorial board of the Wall Street Journal (WSJ), however, has warned the Trump administration that mistakes in trade policy could turn U.S. economic slowdown into recession. In a recent WSJ poll, economists on average saw a 33.6 percent probability of a recession in the next 12 months, up from 30.1 percent in July and the highest level in the survey since its inception in 2011.
Recessions could arrive within one or two years following the inverted yield curves, but some economists argue that the inverted yield curve may not necessarily mean recession is coming.
Former Fed chair Janet Yellen told FOX Business on Wednesday that she doesn't think the U.S. economy is headed toward a recession. "I think the U.S. economy has enough strength to avoid that. But the odds have clearly risen and they are higher than I'm frankly comfortable with."
Goldman Sachs Group Inc. has also warned that the risk of recession is rising amid U.S.-China trade tensions, highlighting the impact on U.S. economic growth. In its latest projection, the U.S. investment bank lowered its fourth-quarter growth forecast by 0.2 percentage points to 1.8 percent.