Should you care about the yield curve inversion?

Other parts of the yield curve have already inverted, beginning late past year. The yield curve is a graph of yields compared to bond maturity times, and normally yields go up as you move to longer maturities.

So what exactly is an inverted yield curve, and how anxious should you be?

Stocks are falling sharply after the bond market threw up another warning flag on the economy.

The recent curve behavior isn't the start of a trend, according to Goldman Sachs. The U.S. 2-year/10-year yield hasn't inverted since just before the Great Recession in 2007, while the U.K.'s yield curve hasn't inverted since 2008, when the world was embroiled in a global financial crisis. Major U.S. stock indexes were down about 2%.

A bond yield is the return an investor gets on a government or corporate bond.

The dollar recovered from early weakness but a gauge of global equity performance edged lower on Thursday as concerns about global growth offset investor optimism over a surge in US retail sales last month and strong Walmart earnings.

That's a sign that the U.S. consumer may be on edge - and it's clear that investors are nervous about the outlook for the USA economy as well. "But the odds have clearly risen and they are higher than I'm frankly comfortable with". "The huge shock from the trade war has basically offset whatever central banks are doing, and that's some of the signals from the yield-curve inversion".

The interest-rate sensitive bank subsector plunged 4.3 per cent, while the broader financial sector fell 3.5 per cent, putting them on course for their biggest one-day percentage fall this year.

All three major USA indexes closed down about 3%, with the blue-chip Dow posting its biggest one-day point drop since October, major equity indices in Europe closed down 2% or near that while crude prices slumped nearly 5% at one point.

"Certainly a yield curve inversion is not indicative of an imminent recession".

While some pundits have said today's inversion is a sign that it's time to sell stocks, it's still as hard as ever for everyday investors to time the market profitably.

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"It could be different this time", Carlson said. -China trade war is disrupting the markets.

What is making the markets so nervous?

This has often been a sign of an impending recession because it shows that investors expect interest rates to fall in the near future. "It's not a healthy situation", he explained. On top of the that, the yield curve is also inverted on 3-year Treasury bonds compared with the 10-year Treasury. The spread is widely used as a gauge to study the yield curve.

Global economic slowdown and trade concerns will continue to weigh on global markets, according to analysts.

But there might not be reason to panic just yet.

Not everyone buys the argument that recession is inevitable - bond markets have been distorted by a decade of multi-trillion-dollar central bank stimulus.

Germany's economy contracted 0.1 percent in the second quarter. German Chancellor Angela Merkel acknowledged August 13 the country is heading into a "difficult phase".

Volatility has returned to the markets in August amid rising tensions in the trade dispute between the USA and China. The new reports raised fears that Europe's largest economy is nearing a recession. And the jobless rate in July hit a record high. That's despite the fact that the Fed has stopped tightening monetary policy and has begun reducing rates, which was supposed to have the opposite effect on long-term interest rates.

If it's all about the economy, the Trump administration would say the president is winning, big time.

"This latest move on the long end of the USA curve is sending the Fed a clear message: the notion of a slow, methodical "mid-cycle adjustment" is very much in question, and at the same time so is the efficacy of lower rates to solve the issues at hand", said Gregory Faranello, head of US rates at AmeriVet Securities in NY.

In a pair of tweets, Trump said, "China is not our problem".

  • Darren Santiago