Inversion of Short- and Long-Term Interest Rates Due to the Spread of Novel Coronavirus... Inevitable Shock from China

[Asia Economy Beijing=Special Correspondent Sunmi Park, Reporter Hyunjin Jeong] Market concerns are growing that the novel coronavirus infection (Wuhan pneumonia) will directly lead to a global economic downturn.

According to Bloomberg on the 30th (local time), an inversion of short- and long-term interest rates appeared momentarily in the U.S. bond market. This was the first time since October last year that the yield on the 3-month U.S. Treasury bill inverted with the 10-year Treasury yield. The spread between the two yields dropped to minus (-) 2 basis points (1bp=0.01 percentage points) at one point during the day. An inversion of short- and long-term interest rates is used as an indicator forecasting an economic recession. When concerns about a global recession peaked in the market last year, the 3-month Treasury yield exceeded the 10-year yield.

The cause of the short- and long-term yield inversion is the spread of the novel coronavirus. Since the outbreak of the virus in China, the yield spread between the two Treasuries has sharply narrowed over the past 20 days. As risk aversion increased, the 10-year Treasury yield dropped sharply. On this day in the New York bond market, the 10-year U.S. Treasury yield closed at 1.586%, and the 3-month Treasury yield at 1.559%. Considering that on the 10th, one day before the first death from the novel coronavirus in China, the yields were 1.821% and 1.533% respectively, the yield spread shrank from 30bp to about 3bp.

James Sweeney, Chief Economist for America at Credit Suisse, said regarding the spread of the novel coronavirus, "There is no doubt that it poses an immediate downside risk to China's economic growth and a potential downside risk to global markets over the coming months."

Economic experts agree that the shock to the Chinese economy from this novel coronavirus outbreak will be greater than that of the 2003 Severe Acute Respiratory Syndrome (SARS). They also say that the global economic shock originating from China could be larger than during SARS.

Jang Ming, a researcher at the Chinese Academy of Social Sciences, a government-affiliated think tank, diagnosed that under an optimistic scenario where the spread of the novel coronavirus is contained by the end of March, China's first-quarter economic growth rate could fall to the 4% range. He explained, "Since consumption accounts for a larger share of the Chinese economy, the economic shock from the virus spread is inevitably greater than in the past." Moreover, he noted that while the SARS outbreak in 2003 occurred during an upward trend in the Chinese economy, this novel coronavirus is spreading amid a downturn, making the impact even greater.

Global investment bank Nomura also diagnosed that China's real GDP growth rate in the first quarter of this year could be more than 2 percentage points lower than the 6% recorded in the fourth quarter of last year, stating, "This will have a greater impact on the Chinese economy than SARS." Nomura's researcher Lu Ting said, "Although Chinese authorities will consider measures such as liquidity supply and credit support, they will not be able to reverse the situation."

Larry Hu, Chief China Economist at Macquarie, described the novel coronavirus as a 'Black Swan.' A Black Swan refers to an event with a low probability of occurrence but enormous impact if it happens. He expressed concern, saying, "The spread of the novel coronavirus could deal a tremendous blow to the global economy," and explained, "China is more deeply involved in the global economic supply chain than in 2003. If there are problems in China's supply chain, the global supply chain will inevitably be affected."

On this day, The New York Times (NYT) described the situation as "one of the world's most important growth engines has effectively shut down," expressing concern about the impact of the slowdown in economic growth originating from China on the global economy.

This content was produced with the assistance of AI translation services.