CITIC Securities-Will the US debt inversion of the previous life, this life, interest rate reduction recession repeat itself again?

CITIC Securities: Will the US debt invert the past life, this life, interest rate cuts and recessions will repeat itself again?

The source of the bond research team is clear: the main points of the report are clearly written. On March 22, Beijing time, the US 10-year Treasury bond yield report receipt 2.

44%, January, March, 1-year, and 5-year Treasury yields were 2 respectively.

49%, 2.

46%, 2.

45% and 2.

twenty four%.

The short-end interest rate is higher than the long-end interest rate, and the yield curve is inverted.

Historically, bond yields usually inverted first, and then the Fed stopped raising interest rates and began to cut interest rates after about half a year.

Will this upside down also be accompanied by future interest rate cuts and economic recession?

This article believes that the inversion of the US debt yield curve this time is the result of a combination of risk aversion and economic recession.

And maintain our 10-year Treasury yield 3.
.

0%?
3.

4% judgment, if further loose monetary policy is implemented in the future, we believe that the 10-year national debt may still exceed 3% and reach 2.

8% level.

  On March 22, the 10-year US Treasury yield closed at 2.

44%,杭州夜生活网 3-month Treasury yield injection 2.

46%.

The short-end interest rate is higher than the long-end interest rate, and the yield curve is inverted.
This phenomenon is generally considered to indicate that current growth will be higher than future growth.

Triggered panic in the European and American markets, several major European and American indexes closed down on Friday.

On Monday, the Asia-Pacific stock market opened significantly lower in the early morning, of which the Nikkei 225 index opened more than 3% lower.

Gold rose in a straight line.

  From the 1980s to the present, there have been five significant interest rate inversions in history, appearing in 1982, 1989, 2000, 2006, and 2019, and three of them have subsequently fallen into economic recession.It was 1990, 2001 and 2008.

Looking at the change in the US federal funds target rate, we can see that from 1982 to the present, the Fed has conducted six rounds of interest rate hikes.

Regular bond yields first reversed, and then the Fed stopped raising interest rates and began to cut interest rates after about half a year.

It is interesting that when the bond yields first inverted, the trend of inversions often did not continue directly. The difference between the 10-year Treasury bond yield and the 3-month Treasury bond yield will first return to a positive value, but will soon be againThere is an upside down, and the fact that this upside down will last for this time.

  Eurozone PMI was significantly lower than expected, maintaining the previous trend.

This is considered to be a preliminary indication of the inversion of the US bond yield curve that day.

We believe that the global economy is interconnected. Although this time is mainly a significant downward trend in the euro zone PMI, the global economy is actually facing downward pressure.

Although the PMI of the United States in 2018 is independent of the international economic situation at a high level, as far as 2019 is concerned, the US economy cannot stand alone, and economic indicators such as PMI have returned to the same global trend.

  Conclusion: We believe that after the risk aversion has dissipated, the term spread may return to a positive value from a short-term upside down, and after the US economic headwind is gradually wiped out, it will turn into a continuous negative value, and eventually lead to the Fed’s interest rate cuts.Maybe the market is too worried.

The inversion of the US debt yield curve is the result of a combination of risk aversion and economic recession.

Based on this, we maintain a 10-year Treasury yield3.

0%?
3.

4% judgment.
And believe that if further loose monetary policy is implemented in the future, the 10-year national debt may still exceed 3% and reach 2.

8% level.

  The text Beijing time on March 22, the US 10-year Treasury bond yield closed at 2.
44%, January, March, 1-year, and 5-year Treasury yields were 2 respectively.

49%, 2.

46%, 2.

45% and 2.

twenty four%.

The short-end interest rate is higher than the long-end interest rate, and the yield curve is inverted.
This phenomenon caused panic in the European and American markets, and several major European and American indexes closed down on Friday.

On Monday, the Asia-Pacific stock market opened significantly lower in the early morning, of which the Nikkei 225 index opened more than 3% lower.

Gold rose in a straight line.
In history, what is the relationship between the end of interest rate hikes and the upside down and interest rate cuts?

Are inverted yields really a precursor to a recession?

In this regard, we comment as follows: short-term interest rates such as interest rate hikes, inversions and cuts on the 22nd, January, March, and one-year Treasury yields exceeded long-term Treasury yields such as 5-year and 10-year.

This phenomenon is generally considered to indicate that current growth will be higher than future growth.
According to research by the New York Fed and senior officials such as White House economic adviser Kudlow, the issue of long-term short-end interest rate spreads is the most indicative of the relationship between 3-month and 10-year U.S. Treasuries.

Therefore, we mainly use these two indicators to represent the short-end and long-end interest rates of US debt.

  As shown in the figure below, from the 1980s to the present, five significant interest rate inversions have occurred in history, appearing in 1982, 1989, 2000, 2006, and 2019, of which three were subsequently closed.The economic recession was 1990, 2001, and 2008.

  Looking at the change in the US federal funds target rate, we can see that from 1982 to the present, the Fed has conducted six rounds of interest rate hikes.
The first round: the interest rate hike cycle was 1983.

3—1984.

The benchmark interest rate is from 8.

5% increased to 11.

5%.

Second round: The interest rate hike cycle is 1988.

3—1989.

The benchmark interest rate is from 6.

5% increased to 9.

81.5%.

This round of tightening has caused economic growth. The subsequent rise in oil prices and the uncertainties associated with the first Gulf War that began in August 1990 have led to a recession in the economy and a shift in monetary policy to loosening.

Third round: The interest rate hike cycle is 1994.

2—1995.

2. The benchmark interest rate is from 3.

25% increased to 6%.

The interest rate hike is believed to have caused the Asian financial crisis that broke out in 1997.

The fourth round: the interest rate increase cycle is 1999.

6-2000.

5. The benchmark interest rate is from 4.

75% increased to 6.
5%.

After the burst of the Internet bubble and the collapse of the Nasdaq in 2000, the economy declined again and again. The “911 Incident” further exacerbated the economic and stock market slump. The Fed immediately turned around and began to reduce interest rates continuously in early 2001.

Fifth round: The rate hike cycle is 2004.
6-2006.

7. The benchmark interest rate was raised from 1% to 5.

25%.

The interest rate hike was 25 basis points for 17 consecutive times until it reached 5 in June 2006.

25% is the largest rate hike in history.

But the 2008 subprime mortgage crisis triggered the global financial crisis, and the Fed began to cut interest rates again to near zero levels.

The sixth round: the interest rate hike cycle is 2016.

12 Now, the benchmark interest rate goes from 0.

75% raised to 2.

5%.

According to the Fed’s interest rate meeting in March this year, if the economic conditions remain unchanged, the Fed will not raise interest rates this year.

  Looking back at the latest situation, the yield on regular bonds first reversed, and then the Fed stopped raising interest rates and began to cut interest rates after about half a year.

Basically, the interest rate curve is inverted and an economic recession may occur within 1-2 years after the end of the rate hike. The interest rate cut is often a measure taken by the Fed to restore the economy after the economic recession occurs.

Earliest, as shown in Figure 1, when the bond yields first inverted, the trend of inversions often did not continue directly. The difference between the 10-year Treasury bond yield and the 3-month Treasury bond yield will first return to a positive value., But soon the upside down will appear again, and this time the upside down will continue.

The changes in the stock market lag behind the bond market and interest rate hike policies. Taking the S & P 500 as an example, two obvious peak declines occurred at the end of 2000 and the end of 2007, about the time when the Fed began to cut interest rates.

  What happened to the European and American economies On March 22, the PMI in the Eurozone was significantly lower than expected, maintaining the previous trend.

This is considered to be a preliminary indication of the inversion of the US bond yield curve that day.

What happened to the European and American economies?

Below we analyze from the perspective of PMI.

  First, the relationship between the US PMI and bond yields The relationship between the US PMI and bond yields is shown below.

It can be seen that in the past five years, there have been some simultaneous changes between PMI and long-term interest rates.

It has little to do with short-term interest rates.

Observing longer-term data, we will find that changes in PMI often lag behind the time when bond yields are inverted, that is, economic data such as PMI 6-12 months before the inversion may still rise and perform well.

Within one year after the upside down, PMI will have a noticeable fall.

We believe that there are two explanations for this phenomenon. One is that the Fed’s policy actions often lag behind the curve. The other is that the Fed will keep raising interest rates to prevent the economy from overheating when the economic data is good.

Figure 5 depicts the changes in the PMI sub-items over the past two years.

It can be found that since 19 years, there has been no own inventory and imports, and the remaining sub-items have started to decline, and the overall PMI has also weakened compared to the overall 18 years.

In fact, this also confirms to a certain extent the view we mentioned above: the global economy has a synergy effect.

Specifically, the PMI new orders index in February was 55.

5%, 58 from earlier months.

2% down 2.

7 averages.

The production index was 54.

8%, down from 60 in January.

5% down 5.

7 averages.

The employment index is 52.
3%, 55 from earlier months.

5% down 3.

2 averages.
The supplier delivery index was 54.

9%, 56 from earlier months.

2% down 1.

3 averages.

The inventory index is 53.

4%, 52 from earlier months.

8% increased by 0.

6 averages.

The price index is 49.

4%, down from 49 in January.

6% dropped by 0.

2 averages.

  Second, the euro zone PMI and bond yields are below, the relationship between European public debt and the euro zone manufacturing PMI is much weaker. Under historical data, only in the 2008 financial crisis, the European public bond yield and PMI index appearedObvious synchronization.

That is, there is a rare upside-down of European public debt rates, and the PMI index has also significantly dropped.

Similarly, from the perspective of each country, the relationship between European national debt rates and PMI is not obvious.

Figure 7 shows the situation in Germany.

Above the bond yields of the above countries, due to the global linkage effect between the PMI in the euro zone and the US PMI, the relationship with the US Treasury bonds is more obvious.

  Third, the global linkage effect of the economy Figure 7 reflects the changes in the PMI of various countries, indicating that the global economy is actually interlinked.

Although this time is mainly a significant downward trend in the euro zone PMI, the global economy is actually facing downward pressure.

Although the PMI of the United States in 2018 is independent of the international economic situation at a high level, as far as 2019 is concerned, the US economy cannot stand alone, and economic indicators such as PMI have returned to the same global trend.

  Fed Views on the Yield Curve Senior Federal Reserve officials have mentioned bond market indicators in the past few weeks, suggesting that the Fed is nervous about its ability to predict the curve.

They disagree on the inverted yield curve: some officials believe that it signals a sharp decline in the US economy.

Fed Vice Chairman Richard Clarida said on February 26 that when interest rates on shorter-term bonds exceed those on long-term bonds, this could be a signal that the economy is coming.

He also said, “Historically, in the United States, the inverted yield curve is actually very rare. Although it is not a Black Swan event, when it happens, it usually indicates that the economy is undergoing a sharp transformation or may even be in recession.

“However, he still said repeatedly that the US economy is now in a good state, but there are risks in the global economy, including the intensification of European economic growth, and Japan has not yet emerged from the crisis.

Another official believes there is an over-interpretation of the upside down.

On March 25, Charles Evans, chairman of the Chicago Fed, said that there was a large number of misunderstandings in the market regarding the slight inversion of the yield curve.

He also said that market tensions are understandable when the yield curve is integrated, but he remains confident in the growth prospects of the US economy.

Prior to evans, St. Louis Fed Chairman James Bullard had said that a slight upside-down of the yield curve was “worrying”, hoping it was temporary.

“The short-term interest rate needs to exceed the overdue interest rate by a few basis points and last for a few days before sending a pessimistic signal to the US economy.

“But overall, senior officials believe that inverted yields may bring negative sentiment.

Atlanta Fed Chairman Rafael Bostic, St. Louis Fed Chairman James Brad, Philadelphia Fed Chairman Patrick Huck, and Minneapolis Fed Chairman Neil Cashash have all said that the Fed should tryAvoid upside-down yield curves; however, the Fed’s most important figures so far appear reluctant to give in; Fed Chairman Powell testified on Capitol Hill last Tuesday that he avoided asking whether the Fed would turn its heads when the yield curve was close to upside-downThe problem; Powell said he believes that the inverted curve means long-term neutral interest rates, that is, monetary policy that neither stimulates the economy nor slows it down.

  Conclusion So, what about the US economy?

Will the inversion of the yield curve trigger a recession again?

As Friday ‘s risk aversion warmed rapidly, funds poured into the debt market to hedge, and the yield curve was inverted. Another expression of the risk aversion was the yen. After the euro zone PMI data was released, the yenUS dollars from 110.

79 strengthened to 109.

78, the average growth rate; then, we think that after the risk aversion has dissipated, the term spread may return to a positive value from a brief upside down, and turn into a negative value after the U.S. economic headwinds are gradually scraping, leading to the FedSwitch to interest rate cuts, but the market may be overly concerned in the short term.When we put our perspective before the financial crisis of 2007-08, at a time when the term spread gradually narrowed (from 30BP to -60BP), the US dollar index shifted from close to 90 to close to 80.In this case, the upside down of the US bond yield curve is the result of the combined effect of risk aversion and economic recession.

Although the fading of the risk aversion may cause the bond yield spread to change around 0bp, instead of expanding upside down rapidly as in 2006; however, it will cause the economy to gradually reduce pressure and increase the degree of inversion. The Fed will also deepen.Or have to turn further.

The logic of a global monetary policy U-turn is still valid, so we maintain our 10-year Treasury yield3.
0%?
3.

4% judgment.

If further loose monetary policy is implemented in the future, we believe that the 10-year national debt may still exceed 3% and reach 2.

8% level.