Such an inversion of two-year and 10-year yields, when 10-year bonds yield less than their two-year debt, has preceded every US recession in the past 50 years. But when investors are anxious that growth will fall off sharply, perhaps as a result of the Federal Reserve pushing short-term rates higher, they're willing to accept less in interest for a Treasury maturing far in the future.
"The market decline in the USA overnight and the flattening of the yield curve reflect that economic growth momentum is taking over as the primary concern for investors, even as the latest ISM manufacturing data is holding up well", wrote Tai Hui, market strategist at J.P. Morgan Asset Management.
Brent crude oil settled at $62.08 per barrel, or jumped up 0.63 percent.
According to the Cleveland Federal Reserve, an inverted yield curve has preceded the last seven US recessions.
"In the initial phase of the inversion of the yield curve markets are anxious and react more aggressively to weak data than to strong data", said Masafumi Yamamoto, chief currency strategist at Mizuho Securities.
On Monday, the difference between the two-year and 10-year Treasury yields dropped to just 0.15 percent, its lowest level since prior to the last US recession.
On Monday, stock markets around the world got some relief after Washington and Beijing agreed to temporarily end their trade war during talks at the G20 summit in Argentina. The Dow Jones Industrial Average closed down almost 800 points, or 3.10 percent, and the Standard & Poor's 500 fell over 90 points, or 3.24 percent. It had earlier fallen more than 1 percent.
The pan-European STOXX 600 index lost 0.76 percent.
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The US Treasury yield curve inversion has been a classic indicator of an oncoming recession in history such as in the build-up to the Global Financial Crisis in 2007 and in advance of the recessions in 1990 and 2001.
Gundlach said the Fed will need to be especially careful in its choice of words when they meet this month to deliver on their promised rate hike. In a flat yield curve, there's little difference between short-term yields and long-term yields. Adding to the risk aversion was news that U.K. Prime Minister Theresa May's push to avoid a so-called "hard Brexit" may be at risk.
Risk markets were also weighed down as optimism faded over a truce made over the weekend between US President Donald Trump and Chinese President Xi Jinping.
The pound was down 0.3 percent at US$1.2703 having touched a 17-month low of US$1.2659 overnight, rattled by Brexit setbacks in parliament.
Lyngen said the inversion of three- and five-year yields had increased the likelihood that an inversion of the two- and 10-year yield would happen by early 2019.
The dollar index, which measures the greenback against six major peers, was down 0.07 per cent to 96.9680.
Against the yen, the dollar rose 0.2 percent to 112.97 yen, clawing back some of the previous session's losses, when it booked its biggest one-day drop since July 20. United States light crude was last up 30 cents at $53.25.