US Short- and Long-Term Interest Rate Inversion Hits Largest Since 2022... Fed Also Warns of Demand Slowdown

[Asia Economy New York=Special Correspondent Joselgina] Amid the forecast of the U.S. Federal Reserve's (Fed) high-intensity tightening, the inversion phenomenon of the U.S. long- and short-term Treasury yields, which is considered a signal of economic recession, has continued for seven trading days. Right after the release of the inflation indicator in the 9% range, the inversion spread (yield difference) between the 10-year and 2-year Treasury yields widened to the largest margin since 2002. The Fed, which has emphasized a soft landing, also diagnosed that demand is weakening and recession concerns are growing across the United States.

On the 13th (local time) in the New York bond market, the inversion phenomenon where the 2-year Treasury yield exceeded the 10-year Treasury yield continued. This marks seven consecutive trading days since the 5th. The 2-year yield, sensitive to monetary policy, surged to the 3.13% range after the June Consumer Price Index (CPI) was released in the morning, reinforcing expectations of the Fed's high-intensity tightening. Meanwhile, the long-term 10-year Treasury yield fell to around 2.91%. Investors flocked to the safe asset of long-term Treasuries, causing bond prices to rise and yields to fall.

As a result, the yield spread between the 10-year and 2-year bonds expanded to -22.7 basis points (1bp=0.01 percentage point), the largest margin since 2000. The inversion of short- and long-term U.S. Treasury yields is generally regarded as a litmus test predicting economic recession. The fact that the yield spread has widened further in an inverted state means that economic outlooks have deteriorated significantly.

However, an inversion of short- and long-term yields does not always lead to a recession. This is why some on Wall Street did not pay much attention to the temporary inversion earlier this year. But as the recent inversion has prolonged, voices warning that it cannot be ignored are growing louder. Deutsche Bank pointed out, "The inversion spread is much larger than the three trading days of inversion seen from late March to early April," adding, "It is difficult to dismiss this as a temporary phenomenon."

Moreover, the Fed's high-intensity tightening is another factor fueling recession concerns. Bank of America (BoA) stated on this day that the U.S. could enter a mild recession. This is because recent economic indicators suggest a slowdown momentum, and consumption is confirmed to be weakening due to inflation. Evercore ISI Vice Chairman Krishna Guha said, "The Fed is increasingly likely to overshoot by raising rates quickly enough to push the economy into a recession."

The Fed also acknowledged market concerns about high inflation and recession possibilities in the economic outlook report, the Beige Book, released on the same day.

The Beige Book, which diagnoses economic trends in the jurisdictions of 12 Federal Reserve Banks, stated, "Signs of demand weakening are increasing in some regions, and recession risk concerns are growing in five regions." It also noted, "Food, raw material, and energy price increases remain significant," and predicted, "These inflationary pressures are expected to persist at least until the end of the year in most regions." This report will be used as basic material for the July Federal Open Market Committee (FOMC) regular meeting held over two days starting on the 26th.

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