Is yield curve inversion coming to Asia?

Published on 28 Aug, 2019

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The US yield curve inverted recently with the widely-tracked spread between 10- year and 2-year bond yields turning negative on August 14 for a brief period, sending the equities market sharply down (Dow fell 800 points, its biggest fall this year). Earlier, in May, the 10-year 3-month yield spread turned negative. The inverted yield curve (negative 10–2-year spread) has preceded economic recessions several times in the past. However, there is no accurate lead time for when the recession will hit following the inversion of the yield curve (studies indicate a range of 8 to 24 months with an average period of 22 months).

Nevertheless, this time, the yield curve’s inversion may be a result of bond buying driving hunt for yields driving the premium for long-term yields down, rather than indicating an imminent recession. For the same reason, as yield spreads rapidly narrow for Asian sovereigns, select Asian yield curves may also invert soon. Indeed, Singapore’s 10-2 year spread turned negative on August 15, the first such inversion since 2006. This is a part of the broader phenomenon for global hunt for yields which has triggered interesting developments such as i) entire yield curves going sub-zero (Germany, the Netherlands, Switzerland) or partly negative (France, Japan); ii) regional governments such as the City of Bremen in Germany extending the maturity of bond issuance to 30-year bonds; and iii) the 50-yr bond issue by Italy being oversubscribed six times at just 2.9% yield. The hunt for yields will continue as monetary policies become more accommodative, economic growth and trade slow further globally, and major geopolitical risks (for instance, US-China trade war and 'No-deal' Brexit) continue while new uncertainties arise (such as Japan-South Korea dispute, market collapse in Argentina, or re-election in Italy). The hunt for yield would cause more yield curves to invert until the market resets amid a (painful) recalibration (fall) of asset prices.

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