U.S. Treasury yields inverted… “Recession Signals” vs “Excessive Concerns”

In the US financial market, as the yields of short- and long-term government bonds, which are accepted as a signal of an economic downturn, are inverted one after another, the debate over whether a real recession will come is heating up. Those who predict a recession believe that a ‘hard landing’ in which growth slows and the unemployment rate rises is inevitable as the US central bank’s Federal Reserve (Fed) announces its policy of sharply raising interest rates to respond to inflation. On the other hand, as the novel coronavirus infection (COVID-19) situation improves, consumption, which accounts for two-thirds of the U.S. economy, will continue to brisk, and there is an objection that concerns are excessive as the stock market also maintains an upward trend.

○ 2-10 year bond yield reversed for the first time in two and a half years

According to Bloomberg and others on the 29th (local time), the yield on the two-year Treasury bond at one point recorded 2.398% in the US bond market on the same day, surpassing the yield on the 10-year Treasury bond (2.396%). It is the first time in two and a half years since September 2019, when the US and China levied high tariffs on each other and waged a kind of economic war, that the yield on the 2-year Treasury bond was higher than the yield on the 10-year Treasury note.

The day before, on the 28th, the yield on the 5-year US Treasury bond stood at 2.56%, surpassing the yield on the 30-year Treasury note (2.55%). The inversion of the 5-year and 10-year bonds is also the first in 16 years since 2006.

The yield on the 10-year U.S. Treasury note, which serves as a benchmark in the global bond market and the 2-year U.S. Treasury bond, which is sensitive to the Fed’s monetary policy, has traditionally represented the difference between long and short-term yields. In general, long-term interest rates are higher than short-term interest rates. It is the same principle as paying a lot of interest if you deposit a deposit for a long time. When this natural phenomenon is reversed, it is taken as a sign that market participants are optimistic about the future economic outlook and is often interpreted as a sign of a recession.

“Before the seven recessions since 1970, two-year and 10-year Treasury yields reversed,” said Stephanie Ross, chief economist at JP Morgan World Wealth Management. . In particular, the global financial crisis occurred two years after the two-year and 10-year government bond yields inverted in 2006.

○ “Clear recession signal” vs “Overworry”

There is a heated debate on Wall Street and the US economic circles about the future of the economy.

Former US Treasury Secretary Larry Summers said, “Given the current high inflation and low unemployment, it is very likely that we will enter a recession in the next 24 months.” Ben Emmons, director of Medley Global Advisory Board, also said, “There has never been a recession without a long-term interest rate inversion.”

On the other hand, Fed Chairman Jerome Powell emphasized that he does not view the risk of a recession as particularly high given the strong US labor market and household finances. In the past, the difference between long-term and short-term interest rates decreased due to a fall in long-term interest rates in the past, but now, some analysts say that the rise in short-term interest rates, which is strongly affected by the Fed’s rate hike, is leading the inversion, which is different from the past. According to the actual Fed report, the current yield gap between 3-month and 18-month bonds is 2.29 percentage points, which is quite wide.

New York = Correspondent Yoo Jae-dong jarrett@donga.com