Short-term interest rates have recently risen above long-term interest rates for the first time since the 2008 financial crisis.
The short-term 3-year interest rates once increased higher than long-term 10-year government bond rates. Regarding this, concerns over a recession is growing in the financial market.
In general, the yield curve inversion can be interpreted as a premonitory phenomenon before the recession. The Bank of Korea (BOK) explained that it is because 3-year interest rates have risen sharply due to the tightening monetary policies of the U.S. However, experts say the yield curve inversion of long- and short-term interest rates can be prolonged as concerns over the recession are growing.
According to the financial market sources on the 21st, the 3-year government bond interest rate recorded 3.784per cent at 11:30 a.m. on the 16th, higher 0.01per cent than the 10-year bond rate of 3.774per cent in 14 years and 2 months since July 18, 2008. On the 20th, the interest rate of the 3-year government bond was 3.823per cent and the 10-year government bond was 3.836per cent, but the interest rate gap between the 3-year and 10-year bonds was 0.013per cent, narrowing from the previous day (0.035per cent).
The market sources are concerned that this trend could continue as the 3-year bond rate surpassed the 10-year bond rate once during the day. In general, a decrease in the long-term interest rate below the short-term interest rate is considered a sign of a recession. This is because the recession usually occurred within 1-2 years after the short-term interest rate surpassed the long-term rate.
According to the BOK, the 3-year interest rate has been higher than the 10-year interest rate only two times between November 2007 and January 2008 and in July 2008, when the country suffered from the global financial crisis. From November 2007 to January 2008, there were 37 days when the short-term interest rate exceeded the long-term rate, and 10 days in July 2008. On December 7, 2007, the gap between the short- and long-term rates widened to up to 0.11percent.
The U.S. also saw a sharp rise in short-term interest rate a day before the results of the Federal Open Market Committee (FOMC), widening the gap between short- and long- interest rates to the lowest level in 22 years. On the 19th (local time), the 10-year U.S. government bond rates closed at 3.569 per cent, and the 2-year bond rate also closed at 3.970 percent.
During the day, the 10-year bond rate soared to 3.60per cent and the 2-year jumped to 3.992per cent. The gap between the two bonds was 0.401per cent, the largest ever in 22 years since August 2000. This year, interest rates of 2-year U.S. treasury bonds have rapidly increased, widening the gap with long-term bond rates.
Since the 2-year bond rates first surpassed the 10-year rates in early April this year, the 10-year interest rate has risen again, but 2-year bond rates have remained higher than 10-year bond rates for more than 2 months.
As monetary authorities said they would continue the price-oriented monetary policy and the U.S. Fed is expected to announce at least 0.75per cent base rate hikes at the FOMC meeting on the 22nd, BOK’s monetary policy normalization is expected to be faster than originally expected.
The BOK pointed out that the yield curve inversion of short- and long-term bonds is due to the U.S. tightening monetary policies, so there is no need to interpret it as a sign of an the recession. In 2007 and 2008, both 3-year and 10-year bond rates decreased, but now both rates have increased.
“The 3-year bond rate is more affected by market expectations for future monetary policies than the 10-year bone rate,” said Gong Dae-hee, head of the bond market team at the BOK’s Financial Markets Bureau. “After the base rates have increased for the first time since COVID-19 in August last year, both 3-year and 10-year interest rates have increased, but the 3-year bond rate rose faster.”
He said, “Unlike the past, the 3-year bond rate rose faster than the 10-year rate due to base rate hikes and inflation concerns, so it is still too early to predict an economic downturn with the interest rate gap. The U.S. Fed also said it is due to Fed’s aggressive rate hikes to curb inflation, not a sin of the economic recession.”
On the other hand, experts are concerned that the short-term rate will remain higher than the long-term rate for the time being as the monetary policy to prevent high prices is needed and concerns over the recession are growing. This is because a rise in short-term interest rates is inevitable, while long-term interest rates are likely to lead to an economic slowdown.
In general, short-term interest rates are highly affected by monetary policies, so it tends to increase with base rate hikes. On the other hand, long-term interest rates are not significantly affected by the base rate hikes, but affected by mid- to long-term inflation and growth outlook. When the base rate increased, the yield curve inversion could continue for the time being as the long-term interest rates decreased due to concerns over an economic slowdown.
Kim Sung-soo, an analyst at Hanwha Investment & Securities, said, “The yield curve inversion of short- and long-term treasury bonds was inevitable due to the still high price and growing pressure to raise interest rates. In the future, the inversion will become frequent, and this trend is expected to continue.”
“In particular, the period of inversion is likely to be longer than in November 2007 to January 2008, the first yield curve inversion occurred,” he said. “The inversion will continue due to weak economic fundamentals and high prices and currency rates in addition to extended tightening monetary policy period and prolonged economic slowdown.” (ANI/Global Economic)