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Bond markets flash warning signs not seen since financial crisis

Written by on 14/08/2019

Bond markets are flashing recession warning signals not seen since the global financial crisis after a slew of gloomy economic data which also prompted a major stock sell-off.

Returns yielded by ten-year UK government bonds – parcels of government debt repaid after a set period of time – fell below two-year bond yields for the first time since 2008.

The phenomenon, known as “yield curve inversion”, was mirrored in trading in US bonds on Wednesday – also for the first time since the crisis.

It means investors are demanding bigger returns for the risk of investing in the short term than they are for the long-term, seen as a significant indicator that they have lost faith in the economy.

Normally, investors would be expected to demand greater yields for putting their money away in bonds for a longer period.

In the US, such inversions have preceded the last nine recessions dating back to 1955.

10-year gilt yield lower than 2-year gilts

Image: 10-year UK bond yields have turned lower than 2-year yields

Stock markets were also in turmoil on Wednesday after official figures showed German growth went backwards in the second quarter while there were more signs of the damage wrought on the Chinese economy by its trade war with America.

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In London, the FTSE 100 index slumped by around 100 points, or 1.4%, while German and French indices fell 2%.

On Wall Street, the Dow Jones Industrial Average opened 1.5% lower.

Oil prices – which tend to reflect the strength or weakness of global demand – also took a hit, with the price of Brent crude slipping by 3% to less than $60 a barrel.

Markets have seen volatile trading over the last few weeks, focused on the escalation of the trade war between Beijing and Washington.

Investors fear the spat between the world’s two largest economies will further drag on already-weakening global growth.

This week, crises in Hong Kong and Argentina, added to the worries over US-China relations, saw US stocks tumble on Monday.

But they made a sharp recovery a day later when the Trump administration said it was delaying the imposition of 10% tariffs on some of the $300bn worth of Chinese imports due to have become subject to them next month.

Wednesday’s turmoil came after figures showed Germany shrank by 0.1% in the second quarter of the year.

Europe’s biggest economy is an export powerhouse particularly exposed to the fall-out from the US-China trade war.

Meanwhile, data from China showed the slowest growth for industrial output in 17 years.

 Sky News

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