US Treasury Yields Surge Short-Term = Recession... Wall Street Predicts "Economic Downturn Next Year"

US 10-Year Treasury Yield Rises 4%P Over 3 Years
Bloomberg Highlights 1980-1981 Period
3-Year Yield Up 6-7%P... US Economy Faces Double Dip
JPMorgan CEO: "Similar to 1970s Recession"
Ray Dalio: "Pessimistic Outlook for Global Economy Next Year"

"It is quite cautious to predict what will happen next year. What we are seeing now is close to the 1970s." (Jamie Dimon, Chairman of JP Morgan)

"The global economic outlook for next year is pessimistic." (Ray Dalio, Founder of Bridgewater Associates)

Recently, as the yield on the U.S. 10-year Treasury bond hit its highest level in 16 years, warnings have poured in from Wall Street that this is a precursor to a recession. In particular, attention is being drawn to the fact that recessions began after sharp interest rate hikes during the high-intensity tightening of the 1980s.

Analysis: Short-term Surge in U.S. Treasury Yields Signals Recession

According to the New York bond market on the 24th (local time), the yield on the U.S. 10-year Treasury bond, a benchmark for global bond interest rates, has risen more than 4 percentage points over the past three years since 2020. In August 2020, the yield on the 10-year U.S. Treasury was around 0.5%, but on the 19th, it surpassed 5% intraday for the first time since July 2007, breaking the 5% mark for the first time in 16 years, before settling back to around 4.8%.

The U.S. Treasury yield has risen more than 4% over the past three years, marking the largest increase since the 1980s. The 1980s were a period when former Federal Reserve (Fed) Chairman Paul Volcker implemented high-intensity rate hikes to curb inflation, during which the 10-year Treasury yield rose to as high as 16%. As a result, the increase in Treasury yields over three years was 6 percentage points based on 1980 and 7 percentage points based on 1981. Current Fed Chair Jerome Powell, like Volcker, has raised the benchmark interest rate from 0-0.25% starting in March last year to 5.25-5.5% through 11 hikes at an unprecedented pace to curb inflation, signaling the start of a prolonged high-interest-rate era. This has caused Treasury yields to surge sharply in a short period.

Bloomberg pointed out that while expectations for a soft landing are widespread in the market, attention should be paid to the fact that recessions have followed rapid short-term spikes in bond yields in the past. In 1980 and 1981, when the 10-year U.S. Treasury yield rose by 6-7% over three years, the U.S. experienced a double-dip recession. The U.S. economy fell into recession from January to July 1980, seemed to recover, but then entered another recession from 1981 to mid-1982. High interest rates led to a sharp increase in borrowing costs for households and businesses, weak consumption, and declines in investment and jobs. Bloomberg noted that although the Fed is currently fighting high inflation with unprecedented rate hikes similar to the 1980s, the market remains optimistic about the economy based on strong employment and consumption.

Bloomberg emphasized, "When U.S. Treasury yields rose too quickly, the U.S. consecutively fell into recessions," adding, "While the Federal Reserve Bank of Atlanta expects the economy to pick up in the third quarter of this year, the market continues to ignore pessimistic economic forecasts. However, monetary policy in the 1980s caused two recessions." Earlier, the Atlanta Fed raised its forecast for the third-quarter GDP growth rate (annualized quarter-on-quarter) from 5.1% to 5.4%.

'Wall Street Emperor' Dimon: "Fed 100% Wrong... Concerns About Next Year's Economy"

Wall Street heavyweights are also issuing warnings that preparations should be made for the shock of economic deterioration. Although predictions about future interest rates vary, concerns about the likelihood of a recession are increasingly emerging.

Jamie Dimon, CEO of JP Morgan

Jamie Dimon, CEO of JP Morgan, who predicted that interest rates could exceed 7%, warned at the 'Future Investment Initiative Summit' held in Riyadh, Saudi Arabia, that "The Federal Reserve's economic forecast 18 months ago was 100% wrong," and questioned whether the central bank and government can adequately respond to the negative economic impacts caused by rising inflation and slowing growth. He criticized the Fed for underestimating inflation as temporary and being late in tightening measures, urging the government and monetary authorities to actively prepare for economic uncertainties.

He diagnosed the current situation as similar to the 1970s, characterized by massive debt, lax fiscal spending, high inflation, and low growth. Volcker, who took office in 1979, raised the benchmark interest rate to 19% to curb U.S. inflation, and a severe recession followed the high-intensity tightening. Dimon especially warned about a potential scenario where interest rates could exceed 7%. He said, "Whether interest rates rise by 0.25 percentage points or not, I don't see a big difference," but added, "Even if the yield curve rises by 1 percentage point, I will prepare for it."

On the same day, Larry Fink, CEO of BlackRock, said, "We will see higher interest rates for a longer period," adding, "Inflation is very serious. It reminds me of the 1970s." He also pointed out that the U.S. government's fiscal deficit and the war between Israel and the Palestinian militant group Hamas could stimulate inflation. At the same forum, Ray Dalio, CEO of Bridgewater Associates, described the global economic outlook for next year as "pessimistic." He said, "The monetary policies we will see will have a greater impact on the world," and concluded, "It is difficult to be optimistic."

Bill Ackman, chairman of Pershing Square Capital and a giant in the hedge fund world, wrote on social media platform X (formerly Twitter) that "the economy is slowing faster than recent data suggests." He revealed that he had "closed all short positions on bonds," indicating an expectation of falling interest rates. This forecast of a slowing U.S. economy and declining Treasury yields aligns with Dimon's view of economic deterioration next year, despite Dimon's expectation of rising rates. Bill Gross, known as the "Bond King," also pointed out recent collapses of regional banks and auto loan delinquency rates on X, stating, "I expect a recession in the fourth quarter of this year."

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