Yield curve in­ver­sion spawns fears over re­ces­sion

The Korea Times - - FINANCE - By Jhoo Dong-chan [email protected]­re­atimes.co.kr

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.

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