Focus: US 2-10 Year Bond Yield Reversal, Is Recession Really Coming | Reuters

[New York, 29th Reuters]–A “reverse yield” phenomenon occurred in the US Treasury market on the 29th, when the yield of 2-year bonds exceeded that of 10-year bonds. As a result, many people are worried that the recession of the US economy is finally approaching.

On March 29, a “reverse yield” phenomenon occurred in the US Treasury market where the yield of 2-year bonds exceeded that of 10-year bonds. Taken in November 2021 in Wall Street, USA (2022 Reuters / Brendan McDermid)

For investors, a reversal of yields on 2-10 year Treasuries on the US Treasury yield curve is a notable warning signal that a recession could come. Most recently, a reverse yield occurred in 2019, and the US economy entered a recession. However, at this time, the pandemic of the new coronavirus worldwide was one of the factors that caused the economic downturn.

Professor Campbell Harvey (Financial Theory) of Duke University’s Fukua School of Business said, “Many people are paying attention to this, and it is safe to take on the aspect of self-fulfillment. Reversal of 2-10 year bond yields People who see it will think that a recession will come and change their behavior, so if you’re a business owner, you’re squeezing your capital investment and hiring plans. “

Harvey’s own research, which quickly utilized the movement of the yield curve as a means of predicting recession, is a separate part from the 2-10 year bond. Still, he added that it’s not a bad thing to prepare for a recession so that he can survive in the event of an emergency.

Meanwhile, broker-dealer LPL Financial said the reverse yield on 2-10 year bonds was a “strong indicator”, explaining that it had foretold all six recessions since 1978.

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According to Anu Gagger, a global investment strategist at the Commonwealth Financial Network, the average time between a reverse yield and the beginning of a recession is 22 months, but the last six times show that the shortest is half a year and the longest is 36 months. There is a great deal of variation.

Some investors nail the yield curve as just one of many indicators in terms of recession expectations. In fact, US stocks have risen in recent weeks, and the year-to-date decline rate for the 500 S & P stocks, which was confirmed to enter the adjustment phase in February, has recently shrunk to around 3%.

That said, many market participants have long followed the signals emitted by the yield curve. Jennady Goldberg, senior interest rate strategist at TD Securities, said, “There is no doubt that psychological factors have been added. The yield curve has worked well so far, because it signals the end of the business cycle. Because it was. “

In the U.S. Treasury market, yields in the short-term zone have risen sharply, incorporating the Fed’s continuous rate hikes, while yields in the long-term zone have been hit by monetary tightening. The rise is only moderate due to concerns about the Fed. As a result, the yield curve became flatter as a whole, and some reverse yields occurred.

Of course, some are not convinced that the yield curve can fully explain economic trends. Some market players have cited the fact that the Fed’s large-scale bond purchases over the past two years have artificially kept 10-year bond yields low, and yields jumped as the Fed began to shrink its balance sheet. , I think it is inevitable that the yield curve will be steepened.

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The tricky part is that each part of the yield curve emits a different signal.

Financial markets are watching the 2-10 year portion of the yield curve, believing that 2-year bond yields are a good reflection of the Fed’s policies. However, many research papers prefer to use the difference in yields between 3-month short-term government bonds (T-building) and 10-year bonds, which does not suggest a recession.

Eric Winograd, senior economist at AllianceBernstein, said the debate over reverse yields was “too hot.” “I understand what is being discussed, and I think flattening and reverse yields are one of the challenges for a wide range of risk assets from a risk-taking perspective, but the difference of 5 basis points (bp) makes them reverse yields. Whether or not it would increase my anxiety about recession. “

Goldberg of TD Securities also pointed out that investors may not take this reverse yield so seriously. He explained that the Fed’s rate hike cycle has just begun, and if the economy is about to go down, there is time to ease the brakes on monetary policy.

However, there is an opinion that the big flow cannot be ignored. “The reverse yield phase is certainly far closer to the recession than the boom,” said Edward Alfseini, senior interest rate and currency analyst at Columbia Threadneedle. We are right now. I’m there. It’s clear that the market has come to a stressful point. “

(Reporters by Megan Davies and Ira Iosebashvili)

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