Stock markets and crypto markets around the world started falling on Wednesday (August 14) over fears of a global recession after the U.S. Treasury yield curve inverted for the first time since June 2007.
The 'Crazy Inverted Yield Curve'
On Wednesday, we got for the first time in 12 years what President Donald Trump referred to as the "CRAZY INVERTED YIELD CURVE" in one of his tweets:
We are winning, big time, against China. Companies & jobs are fleeing. Prices to us have not gone up, and in some cases, have come down. China is not our problem, though Hong Kong is not helping. Our problem is with the Fed. Raised too much & too fast. Now too slow to cut....— Donald J. Trump (@realDonaldTrump) August 14, 2019
..Spread is way too much as other countries say THANK YOU to clueless Jay Powell and the Federal Reserve. Germany, and many others, are playing the game! CRAZY INVERTED YIELD CURVE! We should easily be reaping big Rewards & Gains, but the Fed is holding us back. We will Win!— Donald J. Trump (@realDonaldTrump) August 14, 2019
So what is the U.S. Treasury yield curve, how did it get inverted, and what does it mean?
The yield of a bond is the return you get. As interest in a bond goes up, its price goes up, and its yield goes down.
If you have a chart that shows the current yields for U.S. Treasury bonds -- which come in five varieties: three months, two years, five years, ten years, and thirty years -- you have an "inverted yield curve" at the point in the chart where "short-term investments in U.S. Treasury bonds pay more than long-term ones", as CNBC explained yesterday.
What happened on Wednesday was that the yield for the 10-year note (briefly) fell below the yield for the 2-year note:
What this usually means is that "investors are selling stocks and shifting their money to bonds" because they have "lost confidence in the economy and believe the meager returns that bonds promise might be better than potential losses they could incur by holding stocks into a recession." This leads to higher bond prices and lower yields.
The reason inverted yield curves are worrisome is that they have preceded every recession in the U.S since 1956. The last U.S. Treasury yield inversion occurred in December 2005, and it was followed by the Great Recession, which began in December 2007.
As TheStreet reported yesterday, although yields "subsequently rose to 1.592% for the 2-year Treasury and 1.596% for the 10-year note, putting the curve's slope back into positive territory," it was not enough to prevent "a big sell-off in U.S. stocks, with the Dow Jones Industrial Average falling some 800 points."
Ryan Detrick, Senior Market Strategist at LPL Financial told TheStreet:
The yield curve inverting is a worrisome sign, but don't forget it isn't the best timing signal, as a recession doesn't start for an average of 21 months after the initial inversion. Given the continued strong employment picture and healthy US consumer, there could still be time for this economic cycle to have plenty of life left.
How the Crypto Markets Have Been Reacting
Despite some people (such as Anthony Pompliano) thinking of Bitcoin as a safe haven asset, "digital gold" did not perform as well as physical gold yesterday, with the price falling below $10,000 for the first time since August 1.
According to CryptoCompare, at press time (08:11 UTC on August 15), the Bitcoin price is $9,934, down 5.97% in the past 24-hour period:
As for the altcoins, naturally, the vast majority have not escaped punishment since when Bitcoin sneezes, the altcoins usually catch a cold:
Reaction From the Crypto Community on Twitter
Perhaps, the most interesting reaction came from Twitter user "CryptosBatman" who sent out the tweet below (which was retweeted subsequently by "CZ", the CEO of Binance):
The Crypto Fear & Greed Index has not been this low since December 15th 2018.— CryptosBatman ⚡ (@CryptosBatman) August 14, 2019
That was when #Bitcoin bottomed and slowly started to recover and making new higher lows.
Remember what happened next? An increase from $3,200 to $13,800 in 6 months!
This is a good time to buy $BTC pic.twitter.com/7TGRkcxnhX