Inversion of US 10-Year and 7-Year Treasury Yields: "Difficult to View as a Sign of Recession"

Inversion of US 10-Year and 5-Year Treasury Yields Continues on the 22nd (Local Time)
"Inversions Mainly During Interest Rate Declines Lead to Recessions"
"Historical Low in Term Premium... Potential Short-Long Term Inversion Possible"

[Asia Economy Reporter Yoonju Hwang] Daishin Securities on the 25th analyzed that the recent inversion phenomenon between short-term and long-term interest rates in some segments of the U.S. Treasury market is difficult to interpret as a sign of economic recession, considering ▲different TB (U.S. Treasury Bond) 2-year and 3-month rates ▲rising interest rates ▲and the reduction of term premium.

Researcher Gong Dong-rak of Daishin Securities stated, "The recent inversion differs from past occurrences, and there are no signs at this point that the U.S. economy is heading into a recession."

On the 23rd (local time), in the U.S. Treasury market, the benchmark TB 10-year yield fell by 6 basis points from the previous day to 2.32%, and the TB 7-year yield dropped by 5 basis points to 2.37%, showing an inversion between these two rates. The previous day also saw an inversion between the TB 10-year and 5-year yields.

Researcher Gong said, "The spread between the two yields, which was around 80 basis points at the end of last year, has rapidly narrowed to about 20 basis points this year," but he assessed, "Compared to past inversion phases, there are many heterogeneous factors, so it does not fulfill the characteristics of a pre-recession signal."

As the first reason, Gong pointed out, "The spread trends between the TB 10-year and 3-month yields differ," stating, "Recently, while the TB 10-year minus 2-year spread has been narrowing, the TB 10-year minus 3-month spread is either widening or remaining flat."

Correlation Coefficients Between Base Interest Rate and Major Maturity Interest Rates Since December 2015

As the second reason, Researcher Gong cited that this inversion phenomenon occurred during a period of rising interest rates.

He explained, "When interest rates fall due to expectations of economic deterioration, and long-term rates fall more sharply, it can be interpreted as pricing in the possibility of a recession. However, currently, the overall direction of interest rates is upward."

As the third reason, Gong diagnosed, "With the term premium historically at its lowest, there is an increased potential for the spread between short-term and long-term interest rates to narrow or invert."

He analyzed, "Since the 2008 financial crisis, the Federal Reserve has directly intervened in the bond market through quantitative easing (QE) and other measures," adding, "As a result, interest rate levels have generally decreased, and the term premium granted when purchasing long-term bonds compared to short-term bonds has also significantly declined."

Researcher Byun explained, "This has led to a reduction in the interest rate gap by maturity within the bond market," and added, "In such an environment, there is a greater incentive for interest rate spreads to narrow or invert regardless of fundamentals."

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