Welcome to Thoughts on the Market. I'm Andrew Sheets, Chief Cross Asset

Strategy from Morgan Stanley. Along with my colleagues bring you a variety of

perspectives, I'll be talking about trends across the global investment landscape and how we put those

different ideas together.

It's Friday, August 16th at 2 p.m. in London.

On Wednesday, investors accepted a lower yield to lend to the U.S. government for the next 10 years than to lend to it for the next two.

The so-called inversion of the yield curve is rare.

Investors usually demand a higher rate for longer-term borrowing.

And it's important. Inversions of the yield curve have often been warning signs for the markets and the economy.

The yield on the US 10-year debt fell below that of two-year debt ahead of the recession in 1981, 1989, 2000, and 2007, and hadn't done so at any point since 2010,

despite many market scares.

So why does the old curve invert and what makes this signal so powerful?

Most people demand a higher rate of interest the longer they plan to lend someone money

and for this reason most of the time governments pay marginally more to borrow for longer periods of time.

This logic only shifts in very specific conditions.

If people think that interest rates are about to fall significantly,

or that the world is becoming a more dangerous place,

locking in current rates for as long as possible

suddenly seems like a good idea. Longer-term yields fall faster than shorter ones,

until at some point those longer-term rates are below shorter term ones.

The curve inverts.

And this unfortunately is precisely what's been happening over the last month.

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