The Dow slides more than 550 points after bond market warns of recession

The Dow Jones Index fell by more than 550 points on Wednesday in reaction to signs from the 10-year Treasury bond market and economic data coming out of Germany and China warned of a recession.

The sharp drop in the Dow was caused by the 10-year Treasury bond yield slipping near 1.6% on early on Wednesday, with it falling below the yield for the 2-year Treasury bond – the first time this has happened since the 2007-08 financial crash.

Investors shift away from equities to safer assets

The US blue-chip index suffered major as investors moved money away from equities and into haven investments like bonds, with the S&P 500 and Nasdaq sliding 2.28% and 2.46% respectively on Wednesday.

The main driver of the stock market decline on Wednesday was weaker-than-expected economic data emanating from Europe’s largest economy, Germany, which saw it shrink by 0.1% in the second-quarter of the year as global trade disputes continue to hurt economic activity.

China also released figures overnight that highlighted how the world’s second largest economy is also reeling from its trade was with the US. Manufacturing output in China fell in July, along with weaker retail spending, signalling that a slowdown in economic growth.

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Bond market warns of recession on the horizon

The last time the 10-year Treasury bond fell below its 2-year counterpart, the financial crisis over a decade ago hit.

On average, long-term bonds offer a better yield than short-term bonds with investors requiring a larger pay-out for having their money locked in for a longer period.

However, that yield curve inverted on Wednesday, which is a sign that investors are growing worried about the strength of the US economy.