Two and a half years after the US-China trade war
2-Year Treasury Rate Overtakes 10-Year Treasury Rate
Fed to appease “don’t be afraid”
There has been a phenomenon in which the yields of short-term and long-term U.S. Treasury bonds are inverted. This is seen as a harbinger of an economic downturn on Wall Street. As concerns about stagflation (high inflation and low growth) have increased due to the spread of the COVID-19 Omicron mutation and Russia’s invasion of Ukraine, the world is paying close attention to the signs of a recession from the United States.
According to Bloomberg News on the 29th (local time), the yield on the two-year U.S. Treasury note temporarily surpassed the yield on the 10-year U.S. Treasury at 2.39% on the afternoon of the same day. It is the first time in two and a half years since September 2019, when the two-year bond yield surpassed the 10-year bond, when the United States and China were in sharp conflict over a trade war.
In the bond market, two-year yields are rising sharply as the expectation that the US central bank, the Federal Reserve, will raise the key interest rate by 0.5 percentage points at a time to catch inflation. However, as concerns grow that the Fed’s ‘big step’ will be toxic to the US economy in the long run, 10-year bond yields appear to rise relatively less.
Long-term government bonds have to wait a long time to recover their principal, so as a reward, interest rates are higher than short-term government bonds. Nevertheless, the abnormal situation in which short-term interest rates outperform long-term bonds indicates that market participants are pessimistic about the future of the US economy. Wall Street believes that the inversion between the 2-year and 10-year bonds most accurately predicts a recession. “There’s never been a time where (between two and ten years) the yields of short- and long-term government bonds inverted and there was not a recession without a recession,” Ben Emmons, a strategist at Medley Global Advisory, told Bloomberg.
In fact, after the interest rate inversion in 2006-2007, the global financial crisis hit the world. In September 2019, a reversal occurred and the recession began less than half a year later. However, at this time, an unexpected variable overlapped with the COVID-19 pandemic.
The Fed hastened to appease the market. On the 25th, in a report titled ‘Don’t be afraid, yield curve (bond yield curve), iteration’, he said, “The (soon) 2-year and 10-year yield inversions are receiving excessive attention.” It is not correct to interpret it as a prediction of a recession. There is no need to be afraid.”
Beijing Correspondent Liu Ji-young
