Since the global financial crisis ended in 2010, and all the way through 2018, the United States economy grew at a respectable 2.3 per cent on average. But signs are emerging that this longest-ever economic expansion may be nearing its end. On Wednesday, the Dow Jones Industrial Average recorded its biggest drop of the year, falling 3 per cent, triggering declines in most global markets. The drop occurred despite US President Donald Trump’s decision to delay part of the tariffs on US$300 billion (S$417 billion) worth of Chinese imports that were due to take effect on Sept 1 – which led markets to rally on Tuesday. What appears to have spooked investors are unusual developments in the bond markets. Notably, the yield on 10-year US Treasury bonds fell below the yield on two-year bonds.

Such yield inversion is rare; longer-dated bonds usually offer higher yields, because there is more uncertainty about what would happen in the distant future than in the short term. When investors demand better yields on two-year bonds, they are signalling that they are concerned about the economy’s short-term prospects. An inverted yield curve between 10-year and two-year bonds – a reliable, though not certain indicator of recession – last occurred in 2007, about a year before the global financial crisis. Investors’ fears are not unfounded: On Wednesday, new data showed that Germany, Europe’s largest economy, contracted in the second quarter, raising the risk of a recession in the euro zone, while China reported that its industrial production last month hit a 17-year low.