The markets favorite recession signal is flashing red again as coronavirus fears rage

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• The US Treasury yield curve — one of the most closely monitored recession indicators — briefly inverted on Tuesday for the first time since October.
• The yield of the 10-year Treasury bill fell below that of the three-month bond as coronavirus fears roil global markets.
• The warning sign occurs when investors expect near-term economic risk, though the yield gap between the two-year and 10-year bills is the most closely monitored section of the curve.
• Watch US Treasury bonds trade live here.

The US Treasury yield curve — one of the most closely watched recession indicators — briefly inverted on Tuesday for the first time since October.

The yield for 10-year Treasury bonds fell below that of the three-month bond as concerns around the coronavirus outbreak gripped markets around the world. Yield curve inversions have preceded every recession since 1950, though the gap between the two-year and 10-year Treasury bills is the most closely watched section of the indicator.

A curve inversion occurs when a large enough group of investors flock to long-term bonds. The inflows drive bond prices up and, in turn, push yields lower. If yields for longer-maturity bonds fall below those of short-term bonds, it signals investors expect heightened volatility and market risk in the short term. 

The yield curve un-inverted soon after flashing red on Tuesday, but the indicator marks the first hint of recession risk since fears of economic slowdown peaked in the summer. The inversion arrived as investors rushed into safe-haven assets and coronavirus fears fueled the worst day for stocks since October. 

Despite the warning sign, other indicators suggest the economy remains strong. The unemployment rate sits at a historic low, and consumer spending trends haven’t weakened.

The Federal Open Market Committee unanimously voted to hold interest rates steady Wednesday afternoon, signaling no immediate need for economic stimulus and steady expansion in the US economy. The committee cut rates three times in 2019 to boost the economy amid recession fears and trade war tensions.

Federal Reserve Chair Jerome Powell previously hinted the central bank won’t adjust rates again until inflation rises to its 2% target.

Though the curve now stands un-inverted, the “2-10” inversion seen in late August still looms over US markets. Economic recessions tend to hit their harshest point about 22 months after an inversion, according to Credit Suisse, and markets typically rally roughly 15% in the months following the warning sign.

The S&P 500 is up nearly 15% from the day the two-year and 10-year Treasury yields inverted.

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