The inversion of key parts of the Treasury yield curve, in which investors in short-term holdings get paid more than those in long-term ones, has historically been a reliable indicator of a coming recession.
The likelihood of the U.S. falling into recession next year is "growing", with bond markets pricing in a 38 per cent chance, Fidelity International's cross asset investment specialist Anthony Doyle said. Declines accelerated as Guy Debelle, the deputy governor of the Reserve Bank of Australia, warned of the ramifications of the US-China trade war. "Neither does a yield curve inversion indicate it is time to sell equities", Haefele said. They are demanding higher rates for short-term loans, which is not normal.
Global recession fears, sparked by a brief inversion of the United States 10-year and two-year treasury yield curve, saw regional indices opening sharply lower.
The plunge in longer-term yields like the 30-Year are also a symptom of investor anxiety.
FILE - A Chinese employee walks past new US flags at a factory in Fuyang in China's eastern Anhui province, July 13, 2018.
It's believed that wary investors effectively bid down the price of the longer-term bonds as they look for a safe place to put their money.
Global economic slowdown and trade concerns will continue to weigh on global markets, according to analysts. Long-term yields are negative in Japan and Germany.
The threat of a recession doesn't seem so remote anymore, and stocks sank Wednesday after the bond market threw up one of its last remaining warning flags on the economy's health.
As fears grow of a weaker economy in the future, investors drive down yields on longer-dated assets on expectation that rates will drop.
The UK has just recorded one quarter of declining economic activity, so the idea of an imminent recession is not at all fanciful, although the figures have been influenced by stockpiling ahead of planned Brexit dates and the subsequent rundown of those stocks.
"In our estimation, there would need to be a clear signal of a permanent cessation of trade hostilities between Washington and Beijing to turn around risk and business sentiment", he added. The last time this yield curve inverted was in June 2007 when the US subprime mortgage crisis was gathering pace.
Also Wednesday, European markets fell after Germany's economy contracted 0.1% in the spring due to the global trade war and troubles in the auto industry. "But I think we'll see some calmness back before long since the USA curves inverted only temporarily, not on a closing basis", said Masahiro Ichikawa, senior strategist at Sumitomo Mitsui DS Asset Management.
Investors are caught between slowing global growth, which is weighing on equity markets, with few alternatives to invest in when the dividends of many stocks are higher than the interest on government debt, said Rick Meckler, a partner at Cherry Lane Investments in New Vernon, New Jersey. And what does all this talk about yield curves mean for you and your money?
US Fed officials cut the benchmark interest rate last month for the first fime since December 2008. So the inversion shouldn't be a huge surprise.
The S&P 500 posted eight new 52-week highs and 51 new lows; the Nasdaq Composite recorded 23 new highs and 282 new lows. Overall rates are relatively low, which could eventually boost lending demand.