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Fear of a worsening global economic slowdown dragged bond yields sharply lower last week. The yield on the ten-year Treasury note plunged 20 basis points to 1.55 percent (a basis point is 1/100th of a percent), briefly causing an inversion of the yield curve between the two and ten-year maturities. Since the administration’s Aug. 1 announcement of another possible round of 10 percent tariffs on Chinese imports, the yield has collapsed by an extraordinary 46 basis points. Also last week, the yield on the thirty-year bond fell to an all-time low of 1.97 percent, down from 2.53 percent at the beginning of the month.

Stocks fell for the second straight week, although they finished well off their lows. The S&P 500 fell 0.5 percent, but that was a relative victory after the index fell 3 percent on Monday. Fears of a debilitating currency war with China was the catalyst for the initial decline after the yuan broke through the psychologically important level of 7 to the dollar. But those fears receded after the currency stabilized. 

President Trump turned up the heat in the trade war with China and stocks reacted badly. The S&P 500 had stumbled modestly following Fed Chairman Powell’s post-meeting news conference on Wednesday, but by the middle of the following day had recovered all of that lost ground. It was then that the president announced his intention to impose a 10 percent tariff on the remaining $300 billion of Chinese exports to the U.S. that had to date been exempt, precipitating a 2.5 percent selloff in the index into the close on Friday. In total, the S&P 500 was down 3.1 percent for the week.