Yield curve inversion spawns fears over recession
Fears are mounting over a possible U.S.-initiated global recession after yields on three-year U.S. Treasury notes were higher than five-year bond returns Monday, (KST) for the first time since 2007.
Some pessimists have warned that this should be taken as the harbinger for the beginning of a global recession sending shudders throughout the global financial market.
According to the New York Stock Exchange, bond yields on 10-year Treasury bonds also closed at 2.915 percent on the day, down 0.26 percent from the previous session. By contrast, returns on two-year bonds reached 2.799 percent on the day.
The rate gap between 10-year and two-year U.S. Treasury bonds now stood at 0.116 percentage points, the narrowest figure in 11 years since June 2007.
Interest rates on long-term bonds are usually higher than short-term rates, reflecting the risk of tying up investors’ money for years or decades. This is because investors buy long-term bonds despite possible uncertainties in the future.
For this reason, they tend to start buying short-term bonds when investor confidence is undermined. If more investors rush to short-term bonds, yields on them rise while those on long-term notes decline.
An inverted yield curve, which refers to a reversal where rates on short-term bonds are higher than long-term bonds, is, therefore, often considered to be the dark cloud that precedes a storm because it indicates investors are worrying about tying their money for a long time before a possible recession.
“Growth is likely to slow significantly next year,” said Goldman Sachs in its 2019 outlook report. “We expect tighter financial conditions and a fading fiscal stimulus to be the key drivers of the deceleration.”
Another investment bank giant J.P. Morgan agrees.
“Trade tensions may result in a slowdown in global growth,” it said. “The Federal Reserve may tighten monetary policy too aggressively. Weak labor force growth could hinder economic growth in the future.”
Growing worries over a recession spooked global investors causing heavy losses for Wall Street and major financial markets across the world.
The Dow Jones Industrial Average ended at 25,027.07, down 3.1 percent or 799.36 points. The S&P 500 Index plunged by 3.2 percent to close at 2,700.06. The tech-heavy Nasdaq Composite Index tumbled by 3.8 percent to 7,158.43
A similar symptom is also evident in Korea’s bonds market.
According to the Korea Financial Investment Association, Wednesday, yields on Korea’s 10-year government bonds closed at 2.058 percent that day, down 0.044 percent from previous session.
Rates on the nation’s three-year bonds were also down 0.013 percent from their previous session to 1.901 percent. But the rate gaps between the 10-year and three-year bonds now stands at 0.157 percentage points.
This is the narrowest figure in two years and two months since September 2016.