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14 Aug 07:38 PM

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What does "borrowed time" (5th paragraph) mean?


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Stocks plunged Wednesday, giving back Tuesday’s solid gains, after the U.S. bond market flashed a troubling signal about the U.S. economy.

The Dow dropped more than 600 points, while the S&P 500 fell 2.4% and the Nasdaq sank 2.6%. The Cboe Volatility Index, Wall Street’s fear gauge, jumped to a high of 22 on Wednesday.

The yield on the benchmark 10-year Treasury note Wednesday broke below the 2-year rate, an odd bond market phenomenon that has been a reliable indicator of economic recessions. Investors, worried about the state of the economy, rushed to long-term safe haven assets, pushing the yield on the benchmark 30-year Treasury bond to a new record low on Wednesday.

Bank stocks led the declines as it gets tougher for the group to make a profit lending money in such an environment. Bank of America and Citigroup fell 4.7% and 5.2% respectively, while J.P. Morgan also dropped 3.6%. The SPDR S&P Regional Banking ETF is down 2.9%. S&P 500 financials dipped into correction territory on an intraday basis.

“The U.S. equity market is on borrowed time after the yield curve inverts,” wrote Bank of America technical strategist Stephen Suttmeier.

There have been five inversions of the 2-year and 10-year yields since 1978 and all were precursors to a recession, but there is a significant lag, according to data from Credit Suisse. A recession occurred, on average, 22 months after the inversion, Credit Suisse shows. And the S&P 500 actually enjoyed average returns of 15% 18 months after an inversion before it eventually turns.

The last time this key part of the yield curve inverted was in December 2005, two years before the recession hit.

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