As the global economy sputters, investors are plowing money into long-term US bonds. The 30-year Treasury yield fell to 2.03%, the lowest rate on record.
Government bonds — particularly US Treasuries — are classic “safe-haven” assets that investors like to hold in their portfolios when they’re nervous about the economy. Stocks, by contrast, are riskier assets that tend to be more volatile during economic slowdowns.
Here’s what this all means: Normally, long-term bonds pay out more than short-term bonds because investors demand to be paid more to tie up their money for a long time. But that key “yield curve” inverted on Wednesday. That means investors are nervous about the near-term prospects for the US economy. Bonds and yields trade in opposite directions, so yields sink when investors buy bonds.
William Foster, Moody’s lead US analyst, predicts the US economy will avoid a recession in 2019 and in 2020, despite the yield curve inversion’s warning sign. He expects growth to slow in the second half this year into 2020.
The US economy remains strong: Unemployment is historically low, consumer spending is booming, and the financial system is healthy.
“Even though we’re discouraged by the yield curve’s shape right now, we see few signs of danger ahead,” said John Lynch, LPL Research chief investment strategist, in a blog post.
Stocks have grown volatile lately, with the Dow plunging and rising more than 350 points in each session this week. But the yield curve inversion doesn’t mean the stock market is about to collapse. The S&P 500 has rallied 22% on average between the first time a yield curve inverts and the start of a recession, Lynch noted.
Following the last yield curve inversion in 2005, stocks rose for 12 straight months.