New York CNN Business  — 

The Dow and broader stock market fell back from Monday’s sharp gains as investors worried about recession warning signs in the bond market.

All three major indexes finished in negative territory and are on track to end the month of August in the red.

The Dow (INDU) closed 121 points, or 0.5% lower, while the S&P 500 (SPX) and Nasdaq Composite (COMP) both finished down 0.3%.

With three trading days left in the month of August, the Dow is on pace for a 4% drop. The S&P and the Nasdaq are looking at a 3.7% and 4.3% drop this month, according to Refinitiv.

Bond yields continued to fall as demand for safe havens like Treasuries stayed elevated. The 10-year bond yield, last at 1.4761%, dropped to a fresh three-year low. The 2-year and 10-year yield curves remain inverted, flashing a historical recession indicator. Earlier Tuesday, the 3-month and 10-year yield curves were at their most inverted level since 2007, according to Refinitiv.

“Hope triumphed over realism yesterday, and realism is fighting back,” today, wrote Marc Chandler, chief market strategist at Bannockburn Global Forex.

On Monday, President Donald Trump said that China was keen to head back to the negotiating table. Stocks rallied in response, retracing some of the losses they had incurred on Friday, when the trade spat escalated. However, this optimism seems to have tapered off some.

Trump, who has repeatedly called on the Federal Reserve to cut interest rates to support the ailing economy, tweeted Tuesday afternoon that the Fed “loves watching our manufacturers struggle with their exports to the benefit of other parts of the world.”

Former New York Fed President William Dudley wrote in an op-ed on Bloomberg that Trump’s trade war with China is endangering the country’s economic outlook, in turn propelling the Fed to cut rates.

“Central bank officials face a choice: enable the Trump administration to continue down a disastrous path of trade war escalation, or send a clear signal that if the administration does so, the president, not the Fed, will bear the risks — including the risk of losing the next election,” Dudley wrote.

Two stocks of note to watch: Philip Morris (PM) and Altria (MO) have confirmed that they are in merger talks. Philip Morris (PM) stock closed down 7.8%. Altria (MO)’s shares initially climbed but closed nearly 4% lower.

Consumer confidence data for August came in stronger than expected at 135.1, versus the Refinitiv consensus forecast of 129.5.

After a strong July, economists expected consumer confidence to fall. Although the August level is lower than last month’s, consumers remain confident on the whole.