"That said, it is true that the economic outlook is murkier than before", said Masahiro Ichikawa, senior strategist at Sumitomo Mitsui Asset Management. That's because the longer it takes a bond to mature, the higher the yields investors demand as a protection against inflation.
"The market decline in the USA overnight and the flattening of the yield curve reflect that economic growth momentum is taking over as the primary concern for investors", Tai Hui, a strategist at J.P. Morgan Asset Management told clients.
The dollar, which started the week on a weak footing as the apparent thaw in trade tensions between the US and China cooled demand for the safe-haven currency, extended its fall as investors anxious about the inversion of the short end of the USA yield curve in bond markets. For its part, the central banks says that pushing up rates is necessary to keep the economy from overheating. By December 5 afternoon, the five-year yield was at 2.78 percent, 0.01 percentage points lower than a two-year Treasury and 0.02 points lower than a three-year Treasury.
Global stocks tumbled to one-week lows on Wednesday, as declines by long-dated USA bond yields and a renewal of trade concerns stoked fears of a downturn in the United States, the world's largest economy.
President Donald Trump has been railing against the Fed's ongoing policy of gradually raising interest rates, complaining that it's slowing USA economic growth.
Actually, I expect a recession before that portion of the curve inverts.
"Today's move feels like the market is a scorned lover".
"If that's the case, obviously the dollar has had a nice run, I think we may be seeing the top on the dollar", he said. Asked about the possibility of an inversion at a June press conference, Powell said "what we really care about is what's the appropriate stance of policy".
Commenting on this development, Jeffrey Gundlach, chief executive officer of DoubleLine Capital, said that the yield curve inversion on short end maturities was a signal that the economy was poised to weaken.
The theory may get a test soon.
The spread between the two-year and 10-year Treasury yields was at its flattest level in more than a decade and edging closer to an inversion, when long rates fall below short rates.
Analysts expected the two-year, 10-year yield curve to follow suit.
Yield curve inversions are seen generally as precursors of a recession.
Regardless of other possible reasons, "it is mainly indicative of worries about how long growth in the USA can remain so strong".
While some regional bank presidents have been explicit in arguing the Fed should hold off raising rates to avoid an inversion, the consensus has been consistent: stay the course.
Wait, aren't lower interest rates a good thing?
But markets are doubtful.
The Dow Jones Industrial Average fell 799.36 points, or 3.1 percent, to 25,027.07, the S&P 500 lost 90.31 points, or 3.24 percent, to 2,700.06 and the Nasdaq Composite dropped 283.09 points, or 3.8 percent, to 7,158.43. It was 0.6 percent off a 17-month peak of 97.693 touched on November 12.