Upside down of US debt maturity spread and US economic recession
(1) important leading indicators in history
The expectation of recent interest rate hike has become stronger and stronger, driving the short-term yield to rise rapidly and narrowing the term interest margin. As of April 27, the two-year / 10-year US bond interest margin closed at 24bp. At the same time, the US bond market resumed the selling tide. The 10-year US bond interest rate rose to 2.9% (up 7bp per week), while the short-term yield rose to 2.72% (up 25bp per week) due to the expectation of interest rate hike. The 2-year / 10-year US bond spread has long been regarded as an important leading indicator of US economic recession. Looking back on the six upside downs since 1980, except in 1998, the United States has experienced economic recession or financial crisis within 6 ~ 24 months after the upside down.
(2) correlation causality
The flattening of the yield curve and the upside down of the interest rate spread of US bonds will make it unprofitable for banks to "borrow short and expand long", which will shrink the credit environment and "cool down" economic growth. This is a causal relationship. However, there is more correlation between interest rate spread inversion and economic recession, and there is no inevitability. Specifically, the short-term yield depends on monetary policy, and the long-term yield depends on market expectations and behavior. The short-term yield is mainly affected by the benchmark interest rate. The marginal change of the Fed's monetary policy will make the short-term yield respond quickly. The sensitivity of the long-term yield to the benchmark interest rate is limited, which is mainly affected by the expectation of future economic fundamentals. Among them, currency expectation and actual economic growth expectation are the two main influencing factors. In addition, after 2008, the behavior of the Federal Reserve QE and non central banks to stabilize the exchange rate and buy U.S. Treasury bonds on a large scale interfered with the response of the long-term yield of the bond market to the expectations of investors, thus weakening the predictive power of the spread upside down for the economic recession.
(3) the margin range and duration are more important
Looking back on the term spread upside down of the previous six "successful predictions" of economic recession, we can find the following laws: first, the upside down duration is more than 10 months. Second, the maximum amplitude of upside down is more than 20bp. In recent years, the yield curve of US bonds has become increasingly flat. Compared with the time point of upside down, the upside down range and duration are more important. The main reason is that such upside down fully digests the short-term "noise" and the feedback on the recession signal after the continuous correction of market expectations.
What's the difference this time?
At present, the term spread is in the stage of strong "noise" interference. The short-term fluctuation of term spread is exacerbated by higher inflation expectations, stronger interest rate hikes, faster pace of table contraction, the urgent need for non US central banks to stabilize the exchange rate, and the deterioration of European economic fundamentals. The continuous and deep upside down did not appear, so there is no worry in the short term. However, based on the magnitude, intensity and macroeconomic characteristics of this tightening, we believe that the risk of U.S. economic recession can still not be ignored, and once it continues to hang upside down, the window time between it and U.S. economic recession will be shortened.
