US Economy Remains Strong... Longest Ever 'Inverted Yield Curve' Expected to End

Sustained Interest Rate Inversion Since July 2022
Steady Growth Rate and Eased Inflation
Optimistic Outlook for Soft Landing of US Economy
Dispelling Concerns of 'Recession Warning Signs'

The inversion of long- and short-term U.S. Treasury yields, once considered a precursor to an economic recession, is expected to be resolved soon. This outlook comes as the previously concerning U.S. economy has demonstrated robust growth, leading to growing expectations that the U.S. central bank could achieve a soft landing by cutting benchmark interest rates within the year.

On the 29th (local time), major foreign media cited Phil Blancato, Chief Market Strategist at U.S. asset management firm Ossic, who stated, “Thanks to a resilient labor market, the U.S. economy remains strong,” expressing this forecast.

The phenomenon where the 2-year U.S. Treasury yield is higher than the 10-year yield has persisted since July 2022, marking the longest duration on record. Typically, longer maturity bonds have higher yields.

However, in situations where recession concerns arise, demand for long-term bonds increases (causing long-term yields to fall), resulting in an inversion between long- and short-term yields. Deutsche Bank explained that this inversion has occurred 10 times in the past 70 years, with 9 instances serving as a precursor to recessions.

On this day, the 10-year and 2-year U.S. Treasury yields were approximately 4.180% and 4.404%, respectively, showing an inversion spread of -22.4 basis points (1bp = 0.01%P). On the 24th, the spread narrowed to -14.5bp, the smallest inversion during this period.

Recent indicators showing U.S. economic growth far exceeding expectations and easing inflation have continued to diminish recession fears. Consequently, optimistic forecasts that the U.S. economy can achieve a soft landing through the Federal Reserve’s September pivot (policy shift) are spreading, supporting scenarios for resolving the long- and short-term yield inversion.

Generally, the Fed’s monetary policy affects short-term bonds more, so when benchmark rates are cut, the 2-year yield linked to these rates falls more sharply than the 10-year yield, turning the inversion spread positive.

Bloomberg also predicted last month that the U.S. Treasury market, which has shown long- and short-term yield inversion due to the Fed’s potential September rate cut and the start of the U.S. presidential race, would normalize in the second half of the year.

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