Bond Traders Try Hard to Invert the Whole Curve

Stocks plunged the most since October on Tuesday, with the Dow Jones Industrial Average at one point plummeting 818 points. The thinking among commentators was that the sell-off was sparked by some tweets from President Donald Trump, calling himself “Tariff Man” and implying more are on the way if talks with China break down. But a bigger bogeyman has rattled investors, and it’s called the bond market.

On Monday, for the first time since 2007, a small part of the yield curve inverted as yields on five-year Treasury notes fell below those on three-year notes. As Wall Street interns learn on their first day on the job, an inverted yield curve has historically preceded a recession. So, at the very least, an inverted curve carries a lot of shock value. The one saving grace is that the more widely watched difference between two- and 10-year Treasury yields has yet to invert, but bond traders seem to be doing their best to make sure that happens. Not because the economy is about to go over a cliff tomorrow, next week or even next month, but because as is the case so often in markets, that’s what momentum dictates as those betting on a wider yield curve capitulate and reverse those trades. The gap between two- and 10-year yields has rapidly shrunk in recent days, to 11 basis points from 25 last Wednesday. The potential for an inverted yield curve is the market’s equivalent to the “bogeyman,” the strategists at Brown Brothers Harriman wrote in a research report Tuesday. They feel the move has less to do with the economic fundamentals, especially since the Institute for Supply Management said Monday that its manufacturing gauge for November rebounded and continues to hover around the highest levels since 2004 while the unemployment rate is below 4 percent. “Economic conditions have not shifted that much over the past few weeks” to warrant an inverted yield curve, the strategists added.