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By Anna J. Park
Concerns have been growing over the possibility of an economic recession, as U.S. treasury bonds show a repeated inverted yield curve, meaning that a short-term treasury bond has a higher interest rate than longer-dated national debt, according to financial market analysts, Friday.
Although Korean government bonds haven't yet shown such a deviation from a normal yield curve, the inversion of U.S. treasury bonds' yield curve took place once again on Thursday, local time, when the yield for two-year bonds once stood at 2.337 percent, exceeding the 10-year treasury's 2.331 percent. Such an inverted yield curve was witnessed during Tuesday's market as well, for the first time since September 2019.
Inverted yield curves are normally considered a warning sign for a looming economic recession, as witnessed multiple times throughout history. An inversion in 2006 was followed by the 2008 global financial crisis, and an inversion in 2019 was again met with the pandemic shock in 2020.
While market experts began giving mixed analyses of the causes of the inversion and its repercussions, many market analysts in Korea seem to share the view that it's still too early to predict an economic recession. They say that the spiked short-term interest simply factored in the U.S. Federal Reserve's monetary policy stance.
"Although it's true historically that we often witness economic recessions two to three years after seeing inverted yield curves, it's still inappropriate to call the current situation a threat," a recent report by eBest Investment & Securities stated. "The inversion seems to have excessively reflected the U.S. Fed's accelerated monetary policy transition. It's hard to see any more meaning besides that," the report stressed.
Similar views are shared by other analysts who pointed out that no such inversion has yet taken place in yield differences between U.S. treasuries of three-month maturity and 10-year maturity bonds.
"The financial market now focuses on the inverted yield curves between two-year maturity and 10-year maturity bonds, but the U.S. Fed sees the yield differences between three-month maturity and 10-year treasury as giving more accuracy in market predictive power," Chun Kyu-yeon, an economist at Hana Financial Investment, pointed out. "Given the current increase in yield curves between three-month maturity and 10-year maturity bonds, the possibility of the U.S. economy falling into a recession in the next year is only 6.1 percent, which is a slim figure."
Yet, voices calling for caution are also clearly heard amid the generally optimistic outlook.
"Although current economic indicators of both Korea and major countries do not show features of a downward phase, leading indicators (that show economic data about future movements) and surprise indexes already reflect the features of an economic slowdown," said Chung Yong-taek, head of the research center at IBK Securities.
"It may be too early to predict an economic recession, yet we can tell that we're nearing the inflection point," he added, also mentioning that the inversion shows that economic sentiment has become much more vulnerable due to various factors, including geopolitical concerns.
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