The bond market is sending a scary message of recession, rate cuts and an unending trade war

Investors rushed into the safety of bonds Thursday and dumped stocks, as it appeared the trade war could be prolonged and more painful for the world economy than expected.

The moves in the bond market were dramatic, with the 10-year Treasury yield dropping about 8 basis points in its biggest one-day move since April 1. At the same, traders in fed funds futures bet on the Fed making two quarter-point rate cuts by the middle of next year and possibly a third in the second half of 2020.

Yields on some issues, like the 10-year and 30-year bond, fell through the year’s lows, which previously were viewed as a floor but now served as a magnet for buyers, resulting in an even lower yields. The 10-year yield touched 2.29%, the lowest level since October, 2017.

“The market is obviously telling you that it’s quite worried about some of the incoming data, including the PMIs this morning, the ongoing trade rhetoric and the move in risk assets,” said Mark Cabana, head of short U.S. rate strategy at Bank of America Merrill Lynch. Cabana said the market now believes a full blown trade war is coming, with taxes on all of China’s products.

“The concern the market has right now is that we’re moving toward a worst case scenario, and that could persist for quite some time. If that’s the case, then the market is believing the [weak] economic data, and the Fed will likely need to respond to that by trying to offset and prevent a recession,” he said.

The 10-year yield fell below that of the 1-year for the second time this year. The so-called inverted yield curve has been a reliable sign of a recession if the move is sustained. The U.S. market was also following Europe’s bond market. The German bund slipped to a low yield of negative 0.12%, reflecting concerns about the European parliamentary vote.

Wall Street increasingly believes that the Trump administration is prepared to slap tariffs on another $300 billion in Chinese goods, as no new talks are scheduled. China said through its Ministry of Commerce Wednesday that the U.S. should act with sincerity and change its “wrong actions.””

“This is just adjusting to reflect the new normal—very low neutral rates, difficulties achieving inflation and the risk of a recession,” said Jon Hill, Treasury strategist at BMO.

Bond yields, which move opposite price, also fell in sympathy with the sell off in stocks. The Dow ended the day down 286 points, or 1.1% to 25,490. It had been down more than 400 points during the trading day.

“Normally if you had a day like this a couple of weeks ago, there would be somebody from the Trump administration coming out and saying how progress was being made… and it’s crickets along those lines today, and I think that’s evidence of the extent of the tensions and it seems like we are going to see things probably get worse before they can get better,” said Cabana, early in the afternoon.

Later, around 3:50 p.m., President Donald Trump said he thinks things will probably happen fast with China.Though vague, that appeared to help lift stocks, while yields moved off lows.

Wall Street economists and strategists issued more forecasts Thursday incorporating expectations for another round of tariffs. Trump has threatened to put 25% tariffs on the remaining $300 billion in Chinese imports that so far do not have tariffs.

The bond market also reflected growing fears of a softer economy. Yields made an even bigger move lower Thursday after a morning report that the Markit U.S. manufacturing and services composite fell to a 3-year low of 50.9. Markit said growth in business activity slowed in May as trade war worries increased. It also said the increased uncertainty appeared to hurt orders and confidence.

Mike Schumacher, director rate strategy at Wells Fargo, said the move in yields Thursday may have been overdone, and could have been exaggerated by investors who were forced to reposition.

“It’s the lowest it’s been in a long time. You really have to go back to 2016 to get a sustained monster rally like this one,” said Schumacher. He noted that the 10-year yield had reached a high of 3.21 in November of last year, and has now moved 91 basis points in a six month period. In 2016, 10 year moved to 1.36% , in early July, right after the Brexit vote.