The yield on the 10-year Treasury briefly dropped below the two-year yield, an ominous signal that has predicted past recessions.
Investors have been ploughing money into long-term US government bonds for months, sending yields sharply lower, as they anticipate slower economic growth.
The so-called inversion has correctly predicted many past recessions and is the loudest warning bell yet about a possible recession ahead.
Investors responded by dumping stocks, more than erasing gains from a rally the day before. The Dow Jones Industrial Average dropped more than 600 points in morning trading.
Banks and tech stocks fell sharply, and retailers came under especially heavy selling pressure after Macy’s issued a dismal earnings report and cut its full-year forecast.
Volatility has returned to the markets in August amid rising tensions in the trade dispute between the US and China.
The S&P 500 is down more than 4 per cent as investors fear a prolonged trade dispute could further weaken the global economy.
Traders tend to plough money into ultra-safe US government bonds when they’re fearful of an economic slowdown, and that sends yields lower.
When long-term yields fall enough, market watchers see it as a prediction that a recession could be on the way in a year or two.
The yield on the 10-year Treasury has dropped from 2.02 per cent on July 31 to below 1.6 per cent . The 30-year Treasury yield also hit a record low Wednesday.
Economic data from two of the world’s biggest economies added to investors’ fears. European markets fell even more than their US counterparts after Germany’s economy contracted 0.1 per cent in the spring due to the global trade war and troubles in the auto industry.
In China, the world’s second-largest economy, factory output, retail spending and investment weakened in July.
“The bad news for global economies is stacking up much faster than most economists thought, so trying to keep up is exhausting,” Kevin Giddis, head of fixed income capital markets at Raymond James, wrote in a report.
The losses come a day after stocks rallied when the Trump administration delayed some tariffs on Chinese goods it had planned for September 1.
Fiona Cincotta, senior market analyst at City Index, said that Tuesday’s rally brought on by the delay “was short lived - blink and you missed it.”
Despite the pullback on tariffs, investors are still worried that the trade war between the world’s two largest economies may drag on through the 2020 US election and cause more economic damage.
Overnight, Macy’s plunged 13 per cent after slashing its full-year profit forecast.
The Dow Jones Industrial Average fell 800 points, or 3 per cent, to 25,479. The S&P 500 lost 85 points, or 2.9 per cent , to 2840. The Nasdaq lost 242 points, or 3 per cent , 7773.