Rapid Rise in US Treasury Yields Threatens Soft Landing... Bond King Warns of "Recession Warning Signal"

Recently, long-term U.S. Treasury yields have surged, shaking expectations for a soft landing of the economy. As previously observed in the UK, there are concerns that a sharp rise in Treasury yields could potentially lead to a financial market collapse. Jeffrey Gundlach, CEO of DoubleLine Capital, known on Wall Street as the "Bond King," warned that signals of an imminent recession are being confirmed in the bond market.

The Wall Street Journal (WSJ) reported on the 4th (local time) that if the recent rise in Treasury yields, accompanied by stock price declines and a strong dollar, continues, both the U.S. and global economies could significantly slow down next year, and the risk of a financial market collapse could increase.

The 10-year U.S. Treasury yield, which surpassed 4.8% the previous day reaching its highest level since 2007, retreated slightly as private employment data fell short of expectations. In the New York bond market, the current benchmark 10-year yield is around 4.72%, the 2-year yield sensitive to monetary policy is around 5.05%, and the 30-year yield stands at 4.86%. Although the rapid rise seen until the previous day has paused, yields remain high compared to the beginning of the year.

WSJ assessed that this sharp rise in Treasury yields threatens expectations for a soft landing of the U.S. economy. It also expressed caution about the surge in long-term yields amid recent signs of easing inflation and the Federal Reserve’s tightening cycle nearing its end. The media outlet diagnosed that a combination of expectations for U.S. economic improvement and concerns over federal government debt may have driven up long-term yields.

Voices expressing caution by comparing the recent U.S. Treasury market situation to last autumn’s UK market are also increasing. Jim Reid, strategist at Deutsche Bank, referred to the case where a sharp rise in UK government bond (gilt) yields led to market turmoil, saying, "We are trying to understand how the recent surge in U.S. Treasury yields might amplify risks in the financial system." The shock that rattled financial markets at that time was only contained after the Bank of England (BOE) intervened with measures such as gilt purchases.

Warnings are also coming from Wall Street. Gundlach CEO tweeted on X (formerly Twitter) that "the spread between the 2-year and 10-year yields has narrowed from 108 basis points a few months ago to 35 basis points," warning this is a recession signal from the bond market. Typically, an inversion of short-term yields exceeding long-term yields is considered a litmus test for recession. He added that if the unemployment rate rises by 0.2 percentage points, it would be a recession warning and urged to "fasten your seatbelts."

The employment data released that day showed signs of slowing. According to ADP, U.S. private sector employment increased by 89,000 in September compared to the previous month, falling well short of the expected 150,000. This is a clear slowdown from the August increase of 180,000. This result contrasts with the previous day’s Job Openings and Labor Turnover Survey (JOLTs), which exceeded expectations. Investors are now focusing on the September employment report to be released on the 6th.

Meanwhile, on the same day, the International Monetary Fund (IMF) stated that to achieve a soft landing by lowering inflation without a recession, central banks need to improve their communication strategies regarding monetary policy. The IMF said, "Improving the framework of monetary policy and central bank communication strategies will help achieve inflation targets at lower costs," adding, "In other words, it will create the possibility of a soft landing for the economy."

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