US Treasury Yield Curve Flattens... "Recession Concerns Are Overblown"

[Image source=Yonhap News]

[Asia Economy Reporter Hwang Yoon-joo] There is an analysis that it is excessive to interpret the narrowing of the US long- and short-term Treasury yields as a sign of an economic recession.

On the 26th (local time) in the New York bond market, the 10-year Treasury yield rose 0.147% from the previous session to 2.488%. During the day, it also surpassed 2.5%. The 2-year yield was 2.2843%, narrowing the spread between the 10-year and 2-year Treasury yields to about 20 basis points (0.20 percentage points).

The flattening of the US Treasury yield curve (the reduction in the difference between long- and short-term Treasury yields) has raised concerns about recession and stagflation (economic slowdown amid high inflation). Empirically, when the yield curve flattens and then inverts between long- and short-term Treasury yields, a recession has occurred within 1 to 2 years. In fact, since 1960, there have been 10 instances of yield curve inversion in the US, and except for the cases in 1966 and 1998, all other instances were followed by a recession within 1 to 2 years.

The securities industry views the recent flattening of the US Treasury yield curve as an overinterpretation if seen solely as a sign of recession. A representative from Daishin Securities explained, "The flattening of the Treasury yield curve can be divided into economic factors and monetary factors. Currently, it is interpreted that the rapid rise in short-term yields due to the Federal Reserve's tightening policy (monetary policy) is a bigger factor."

As evidence, the securities industry points to the improving trend in the real indicators of the US economy. Hi Investment & Securities stated, "Among the components of the US leading economic index, the contribution of real-related indicators, mainly composed of new order indicators, has been prominent since the fourth quarter of last year," adding, "Considering that the most recent value of the leading index is from February, the New York Fed's Weekly Economic Index (WEI), which reflects the flow after the Russian invasion, also shows continued improvement."

The solid employment market is also one of the factors lowering the possibility of a recession. KB Securities emphasized, "Federal Reserve Chair Jerome Powell mentioned that there are 1.7 job openings per person, indicating very strong employment demand. As the spread of COVID-19 weakens, the employment market is expected to recover further," highlighting the US's confidence in the economy. According to Powell's remarks, since the employment market is 'extremely' strong, the probability of a recession even with interest rate hikes is low.

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