Asian stocks stumbled and oil prices extended a punishing sell-off on Thursday as investors feared an historic drop in long-term U.S. bond yields could portend a recession globally.
Spooked investors stampeded to the safety of sovereign debt and drove yields on 30-year Treasuries to all-time lows at 1.965%. Yields have now fallen a staggering 60 basis points in just 12 sessions to pay less than three-month debt.
Yields on 10-year paper dropped to 1.545%, taking them under two-year paper. Such an inversion was last seen in 2007 and correctly foretold the great recession that followed a year later.
“The yield curves are all ‘crying timber’ that a recession is almost a reality and investors are tripping over themselves to get out of the way as economic recession hurts corporate earnings and stocks can drop as much as 20%,” said Chris Rupkey, chief financial economist at MUFG Union Bank.
The only saving grace was that the sheer scale of the scare would be bound to alarm central banks everywhere and likely draw a policy response, especially from the Federal Reserve.
The futures market was clearly expecting drastic action as it priced in a greater chance the Fed would have to cut rates by half a point at its September meeting.
“Hoping for the best on the policy front but positioning for the worst on the economic backdrop seems to be the flavor of the day,” said Stephen Innes, a managing partner at ValourMarkets.
“The Fed, now out of necessity alone, will need to adjust policy much more profoundly than they expected.”
That hope helped E-Mini futures for the S&P 500 nudge 0.5% higher in late Asian trade, while the EUROSTOXX 50 was last traded up 0.3%, suggesting a modestly higher open for European stocks.
Kozo Koide, Asset Management One’s chief economist, dismissed the possibility of an inter-meeting move by the Federal Reserve before the scheduled September review under the current situation.
“I doubt if this is a good signal of a recession. Obviously some program trades were set off when the inversion occurred, and caused the markets to tremble. Although I expect a September cut, the situation is still far from a crisis.”
MSCI’s broadest index of Asia-Pacific shares outside Japan dropped 0.7% and briefly touched a seven-month low.
Japan’s Nikkei average was off 1.3%, while China’s benchmark Shanghai Composite lost 0.4% and Hong Kong’s Hang Seng stood flat on the day.