US Treasury Yield Curve Inversion Sparks 'S-Fear'

Fed Focuses on 'Recession Signal'

Analysis suggests that the inversion of long and short-term US bond yields indicates an 'abnormal signal' for the US economy.

According to US CNBC and other sources on the 26th (local time), the yield on 10-year US Treasury bonds fell to 4.254% annually, down 0.04 percentage points from the previous day.

Meanwhile, the yield on 3-month Treasury bonds rose by 0.008 percentage points to 4.3% annually, showing an 'inverted yield curve' where short-term yields exceed long-term yields. Generally, markets determine yield curve inversion based on the difference between 10-year and 2-year Treasury yields. CNBC reported that the New York Federal Reserve and others have been looking at the difference between 10-year yields and 3-month yields (which are more sensitive to Federal Reserve monetary policy) as one of the reliable indicators of recession concerns.

As the Fed also considers the yield curve inversion as a signal of recession, concerns about stagflation (recession + high inflation) are spreading in the market. This is because historically, while yield curve inversions don't always lead to recessions, this phenomenon has generally appeared when the US economy was heading toward a downturn.

However, RSM Chief Economist Joseph Brusuelas said, "Investors take risk-averse attitudes due to growth fears that appear cyclically in the late stages of the economic cycle," adding that "it's not clear whether (the bond yield inversion) is a signal that economic activity will slow down in the future."

Reporter An Sang-mi saramin@hankyung.com