The upside down of US bond yields is highly accurate in warning the US economic recession. Since the two-year US bond yield data in 1976, the 2y-10y yield inversion of US bonds has never sent a wrong signal to the economic recession. Relevant research of the San Francisco Federal Reserve further pointed out that the long-term and short-term yield inversion of US bonds only sent a wrong signal in the mid-1960s after 1953, and all the others are correct. The yield of two-year US bonds mainly reflects the market’s interest rate expectation for more than one year in the future, while the yield of 10-year US bonds reflects the long-term interest rate expectation and term risk premium, which involves the expectation of long-term economy and inflation. At the same time, as the most important anchor of fixed income asset allocation and interest rate in the world, the yield of 10-year US bonds also includes information such as market risk aversion and asset allocation style. The upside down of 2Y and 10Y reflects that the market is pessimistic about the long-term expectation of the economy. In addition to strong signal significance, upside down itself also has a negative impact on the economy and financial markets. First, the pressure on Residents’ short-term debt and the upper limit of credit limit will be pushed up to curb residents’ willingness to consume; Second, reduce the profit space of commercial banks to “borrow short and expand long” and curb the willingness of banks to lend; Third, disrupt the pricing system of the financial system and increase financial instability.
Don’t believe too much in “this time is different”. At present, the market questions the significance of this inverted signal early warning mainly include the following three points: 1 Some analysts believe that the current high inflation and downward inflation expectation curve distorts the practical significance of the bond yield curve. But we don’t think this will weaken its signaling role. First, the short-term high inflation has pushed up the expectation of raising interest rates, which is the main reason for the recession when the economic outlook is not strong enough. Therefore, the change of yield curve caused by inflation expectation does not destroy the principle of predicting recession; Second, the current high inflation itself is the biggest risk of recession, and the current upside down also correctly reflects this factor. 2. Some analysts believe that QE affects the term risk premium of bonds, thus distorting the yield curve and making the upside down unable to correctly reflect the market expectation. But we don’t think this will weaken its signaling function. First, the bond term risk premium itself can also predict the recession, and the distortion of QE to the yield curve itself is also a part of predicting the recession; Second, QE lowers the long-term interest rate and creates a loose monetary environment, which is also an important factor in accumulating financial risks. The upside down also correctly reflects this risk. 3. Some analysts believe that although the 2y-10y yield is upside down, 3m-10y has not been upside down, so it is not a worry that the signal is not strong. We believe that the deviation between the two interest rates is a reasonable phenomenon, because the Federal Reserve has just begun to raise interest rates, the interest rate level is low, and 3M yield reflects the current policy interest rate, so 3m-10y will not hang upside down of course, but with the strong expectation of interest rate increase gradually fulfilled, unless the Federal Reserve turns to interest rate reduction prevention in advance, 3m-10y hanging upside down is also on the way.
The fundamentals of the US economy also showed signs of recession. The core logic of the American economy is the promotion of the cycle from employment to consumption. At present, although the US job market is tight, it is unhealthy. A low unemployment rate coupled with a high level of inflation will put considerable pressure on the economy. Although the unemployment rate in the United States has fallen to an all-time low, this is mainly due to the withdrawal of a large number of workers from the labor market after the epidemic. So far, the total non-agricultural employed population has not recovered to the pre epidemic level. Therefore, the current job market has not reached the potential level of full employment, but has triggered inflationary pressure equivalent to the extreme overheating period. It brings great difficulty to the “soft landing” expected by the Federal Reserve. At the same time, although the wages of American workers have increased rapidly, inflation has risen faster, the actual wage growth rate is negative, and the U.S. consumer confidence index has dropped to an all-time low, indicating that there may be a rapid decline in consumption in the future. In addition, the rapid rise of U.S. mortgage interest rates has also triggered a sudden cooling of the real estate market and increased downward pressure on the economy.
What impact will the upside down of US debt bring? Historical experience shows that the upside down of US debt has a strong predictive effect on the Fed’s interest rate cut, even stronger than that of economic recession. Because the downward pressure on the economy revealed by the upside down of US bonds is very strong, the Fed can not ignore these signals. The current macro environment is special. The Fed has just started the cycle of raising interest rates and will act quickly and violently under the influence of high inflation. However, the Fed’s attitude may jump in the future. Once there are signs of easing inflation, the Fed may soon turn to doves. We believe that the Federal Reserve will increase interest rates strongly in the second quarter and shrink the table at the same time. It will ease slightly in the third quarter and may stop raising interest rates in the fourth quarter. This round of interest rate hike cycle will not be too long. In terms of asset prices, for US stocks, the upside down of US bond yields usually does not have an immediate impact on the stock market. During the upside down period, large US stock companies usually perform better than small enterprises. For bonds, the 2y-10y upside down of US bonds usually corresponds to the high yield of 10-year US bonds. The current situation is slightly different, because the Federal Reserve has just begun to raise interest rates, there is a high probability that the table will be reduced in May, and the yield of 10-year US bonds still has the power to continue to rise. However, we don’t think the yield of the US bond is expected to rise by about 3% this year. For commodities, many views are optimistic about gold, but we don’t think we should rush. The investment opportunity of gold usually does not lie at the beginning of the upside down of US debt, but when the yield curve is corrected upward. In the long run, with the opening of the global de dollarization process, the upward movement of the long-term inflation center and the aggravation of national debt problems, gold prices have a strong upward momentum. But in the near future, we might as well wait for the marginal change in the attitude of the Federal Reserve before starting allocation.
Risk tips: 1 The Fed raised interest rates too quickly, leading to an early recession. 2. High inflation in the United States leads to global stagflation.
