Investors Are Getting Nervous, And Topsy-Turvy Interest Rates Are Proof

In a worrisome sign for the economy, the interest rate on short-term U.S. Treasury securities actually rose above that of longer-term instruments.

The unusual phenomenon is known as an inversion of the yield curve, something that hasn’t occurred since 2007. It often signals a slowing of growth and perhaps even a recession, economists believe.

Uncertainty about the economy spilled over into the stock market on Tuesday. The Dow Jones Industrial Average was down nearly 600 points, or about 2.3 percent, in afternoon trading.

“What investors are worried about is the near-term economy. They’re worried that something pretty serious is going to go wrong within the next, say, six to 12 months, and that’s going to tip the economy into recession,” says Jared Bernstein, a senior fellow at the Center on Budget and Policy Priorities.

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Normally, investors want more money to invest in long-term bonds, because they’re agreeing to lock up their money for a greater period. That’s why interest rates on, say, five-year notes tend to be higher than those on two-year notes, and 10-year notes tend to pay even more than that.

But on Monday, the reverse happened: Five-year notes paid less than three-year notes, an indication that bond investors aren’t too sure what the next few months will bring.

Bernstein, a former White House economist, notes that “bond investors tend to be a pretty nervous lot anyway.” In this case, they’re seeing a number of problems, he says.

“They don’t like the fact that global growth is clearly slowing. The price of oil is really in bear territory. It’s fallen a great deal over the past few months. The Federal Reserve is kind of tapping the growth brakes. They’re not hitting them too hard, but it does slow the economy down,” Bernstein says.

At the same time, the one-time stimulus provided by last year’s tax cuts is likely to fade in 2019, Bernstein notes.

Then there’s the tariff war between China and the United States, which threatens to upend trade relations between the world’s two largest economies.

Over the weekend, President Trump agreed to delay an increase on tariffs on Chinese imports, a sign that trade tensions may be easing, and stock prices rose on Monday.

But by Tuesday, investors were reassessing what had been accomplished over the weekend, and stocks were falling again.

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