In the US Bond Market, Another Inversion of Short- and Long-Term Yields... Growing Fear of Economic Recession

[Asia Economy New York=Special Correspondent Joselgina] The inversion of the US long- and short-term government bond yields during the trading session further intensified concerns about a so-called ‘R (Recession)’.

On the 5th (local time) in the New York bond market, the yield on the US 2-year Treasury briefly surpassed the 10-year Treasury yield, standing at 2.792% compared to 2.789% for the 10-year. Similar intraday yield inversions had occurred temporarily in March and June.

The inversion phenomenon, where the short-term 2-year yield exceeds the benchmark long-term 10-year yield, has traditionally been regarded as a precursor to recession. Since 1960, except for the cases in 1966 and 1998, every time the long- and short-term Treasury yields inverted, a recession occurred within 1 to 2 years. Economic media CNBC reported that "the warning light indicating the possibility of a recession has turned on."

Ian Rinzhen, head of US interest rate strategy at BMO, stated, "Given that the 10-year Treasury yield is below 3%, the occurrence of this (long-short term yield) inversion suggests that something significant is happening in investor sentiment that cannot be ignored." He added, "It is not a direct signal that a recession is imminent," but assessed that "it aligns with increasing concerns about a recession."

The 10-year yield surged to about 3.5% in mid-last month due to inflation and the Federal Reserve’s rate hikes this year. However, as recession fears spread and demand for government bonds increased, it has fallen to around 2.79%. The decline in Treasury yields indicates a rise in bond prices, which are considered safe assets. In contrast, the 2-year yield, which is more sensitive to monetary policy, continues to rise due to the Fed’s tightening effects.

Experts point out that a temporary inversion like this day’s is less predictive of a recession than a sustained inversion over a significant period. However, recent indicators suggesting a slowdown in economic growth in the US have increased market fears.

The Atlanta Federal Reserve Bank’s GDPNow, which compiles real-time data, forecasted on the 1st that the US second-quarter GDP growth rate would be -2.1% annualized. This is a larger decline compared to -1.0% at the end of last month. If this continues, a ‘technical recession’?defined as two consecutive quarters of negative growth?could become a reality following the first quarter.

Nomura warned that major countries worldwide, including the US, Eurozone, UK, Japan, Korea, Australia, and Canada, could enter a recession within 12 months.