Treasury bills' moves raise fears, zap stocks

FILE- In this March 13, 2019, file photo traders gather at the post that handles Oaktree Capital Group on the floor of the New York Stock Exchange. The U.S. stock market opens at 9:30 a.m. EDT on Friday, March 22. (AP Photo/Richard Drew, File)
FILE- In this March 13, 2019, file photo traders gather at the post that handles Oaktree Capital Group on the floor of the New York Stock Exchange. The U.S. stock market opens at 9:30 a.m. EDT on Friday, March 22. (AP Photo/Richard Drew, File)

One of the most closely watched predictors of an economic recession reached an ominous target Friday.

For the first time since before the latest recession, a Treasury bill maturing in three months yielded more than a Treasury bill maturing in 10 years.

Signs that investors are losing confidence in the economy roiled Wall Street. The S&P 500 index dropped 54.17 points, or 1.9 percent, to 2,800.71. The Dow Jones industrial average gave up 460.19 points, or 1.8 percent, to 25,502.32.

The Nasdaq composite, which is heavily weighted with technology stocks, slid 196.29 points, or 2.5 percent, to 7,642.67. The Russell 2000 fell 56.49 points, or 3.6 percent, to 1,505.92.

Economists call the Treasury bill development an inverted yield curve. Normally, short-term bonds yield less than long-term bonds, which require investors to tie up their money for a prolonged period. When a short-term bond pays more than a long-term bond, the yield curve has inverted. It's a warning signal with a fairly accurate track record.

A rule of thumb is that when the 10-year Treasury bill yield falls below the three-month yield, a recession may hit in about a year. Such an inversion has preceded each of the past seven recessions, according to the Federal Reserve Bank of Cleveland.

The yield on the 10-year Treasury bill dropped to 2.43 percent from 2.54 percent late Thursday, a big move. The three-month Treasury bill rose to 2.46 percent on Friday. The three-month rate is up from 1.71 percent a year ago.

The last time a three-month Treasury bill yielded more than a 10-year Treasury bill was in late 2006 and early 2007, just ahead of the latest recession.

"It is freaking the stock market because an inverted yield curve has a history of predicting recessions," said Ed Yardeni of Yardeni Research. "However, it is just one of the 10 components of the Index of Leading Economic Indicators, which remains on an uptrend."

The slide in bond yields hurt bank stocks which, along with technology companies, accounted for much of the broad decline in stocks.

"What's really giving investors concern today is this weak global economic data here in the U.S. and in Europe," said Jeff Kravetz, regional investment director for U.S. Bank Wealth Management.

Smaller-company stocks are often the first to be sold by investors looking to reduce risk, which explains why the Russell 2000 was down more than the rest of the market. Small companies, which are more dependent on the U.S. economy than big multinationals, tend so suffer more in economic downturns.

"When investors feel nervous about the economy and the outlook for the stock market, they want to sell the riskiest types of stocks, and that would definitely be small caps," Kravetz said.

Despite wavering from gains to losses throughout the week, the S&P 500 index is still up more than 11 percent so far in 2019, which still counts as a blockbuster start to a year.

The fear that gripped investors Friday was fueled by a steadily dimming outlook for the global economy. China, the world's second-largest economy after the United States, is weakening. And other economies that depend heavily on purchases in China have suffered as a result.

Factory production in the euro currency alliance, for instance, has fallen at its steepest rate in about six years. In Germany, Europe's largest economy, a survey of purchasing manager manufacturers posted its sharpest production drop in nearly six years. Orders to German factories have also tumbled.

The prospect of slowing global economic growth has motivated investors to rebalance their holdings as they "digest the new reality," said Marina Severinovsky, investment strategist at Schroeders. "We're sort of coming back to Earth."

Central banks have been positioning themselves to deal with the slowdown, she said, and that includes the Fed's expectations for no rate increases this year.

Earlier this month, the European Central Bank said it would push back the earliest date for interest-rate increases. It also said it would offer ultra-cheap loans to banks, supporting their ability to keep lending.

"It's very positive that, not just the Fed, but other policymakers have acknowledged the situation is kind of dangerous on the global slowdown and are taking action," Severinovsky said.

The decline in bond yields threatened the profitability of banks because it forces them to charge lower interest rates on loans. Bank of America slid 4.2 percent, JPMorgan Chase lost 3 percent, Citigroup dropped 4.6 percent and Wells Fargo fell 3.1 percent.

Not all yield-curve inversions signal a recession is in the offing.

The Fed sensed a slowdown in the past few months, putting interest rates on hold until the U.S. economy adjusts to a more rapidly decelerating global economy.

"The yield curve inversion, coming quickly after a dramatic 'about face' for the Fed, is undermining investor confidence," said Kristina Hooper, global strategist at Invesco. "At the end of the day, we have to remember that an inverted yield curve doesn't cause a recession, it's just a good indicator that one is coming. Investors should not be panicking."

The American economy is still remarkably healthy. U.S. stock indexes are near all-time highs, unemployment is near a record low, real wages are increasing, interest rates are fueling the economy with cheap money and oil is inexpensive.

Campbell Harvey, a Duke University finance professor whose research first showed the predictive power of the yield curve in the mid-1980s, stressed that an inversion must last, on average, three months, before it can credibly be said to be sending a clear signal. If that does occur, history shows that the economy will fall into a recession over the next nine to 18 months.

But even with the yield curve's track record for predicting recessions, Harvey emphasized that there was no such thing as certainty in economic forecasting.

"A model is just a model," he said. "It's not an oracle. It helps us forecast the future, but it might at any point fail."

Information for this article was contributed by Damian J. Troise, Alex Veiga and Stan Choe of The Associated Press; by Thomas Heath of The Washington Post; and by Matt Phillips of The New York Times.

Business on 03/23/2019

Upcoming Events