Investors look beyond Dow Jones as bond markets flash red

Donald Trump’s favourite stocks index – the Dow Jones Industrial Average – has barely fallen 6 per cent between the US president starting May with a tweet signalling more tariffs on Chinese imports and ending the month with a sudden threat to slap new levies on Mexican goods.

Seasoned financial investors, however, are more worried about flashing red lights on bond markets, amid fears that Trump’s protectionist impulses will tip the world – in which many major economies are already slowing – into recession.

The market interest rate, or yield, on three-month US government debt rose convincingly this week above the yield on 10-year bonds – a phenomenon that has preceded every downturn on the world’s largest economy since the second World War.

This development goes against normal market conditions where buyers of long-term bonds expect higher interest rates than those who invest for only a matter of months. There are good reasons for investors typically demanding higher yields on long-term loans, as inflation eats into their returns over time, and they face greater risks – of an extremely low yield in the case of government bonds – of not getting their money back.

When short-term rates fall below long-term ones – which bond market types refer to in their lingo as an inverted yield curve – it signals that investors are expecting the economy to fall into recession, and are piling into the safest assets they can get their hands on to ride out the storm. Long-term US bonds, after all, are considered to be one of the world’s safest investments.

It also indicates that investors are betting that an economic shock will force central banks to lower rates.

As of early trading on Wall Street on Friday, three-month US treasury bills were yielding 2.3 per cent while 10-year

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