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the longest "inversion" in history has ended, expectations for interest rate cuts have increased, and the market is discussing the "us economic recession theory."

on wednesday, the 2-year u.s. treasury yield fell below the 10-year treasury yield, ending the 26-month-long yield curve "inversion", and then fluctuated in a narrow range just above the "inversion" mark. in the financial market, the "interest rate sensitive" u.s. treasury yield curve has always been regarded as a forward indicator of economic recession.

the “recession” debate

analysts are divided as the yield curve re-steepens, with some saying the phenomenon could signal an impending recession.

jim reid, a strategist at deutsche bank, said:

“recessions tend to begin when the yield curve recovers from inversion, and in fact, this has been the case for the past four recessions.”

however, this round of u.s. treasury yield curve inversion has lasted for more than two years, but the economic recession has not yet occurred. many analysts questioned that "the yield curve has now failed as a recession indicator and is completely meaningless as a market signal."

james reilly, an economist at capital economics, said:

“while inversions have often preceded recessions in the past ... this change in yields reflects more investor concerns than a new recession signal. we doubt a recession is on the horizon this time.”

economic data "red light on"

in addition, some analysts believe that more attention should be paid to economic data, rather than the shape of the curve, as these data may provide clues to the future path of us borrowing costs.

on wednesday, the u.s. bureau of labor statistics released a report showing that the number of jolts job vacancies in the united states in july was 7.673 million, the lowest in three years and far below the expected 8.1 million. the number of layoffs rose to 1.76 million, the highest since march 2023. analysts generally believe that there are obvious signs of weakness in the u.s. labor market. short-term government bonds rose sharply after the data was released.

ajay rajadhyaksha, chairman of barclays global research, said:

"at the margin, the jolts data is indeed important and the fed is taking it very seriously. and the market knows they are not going to ignore it. it is not so much a yield curve issue as a front-end rally in anticipation of a faster rate cut cycle."

in fact, as early as the beginning of last month on "black monday", the yield curve briefly ended its "inversion", and the sluggish non-farm data in july also raised concerns about an impending recession and prompted investors to bet that interest rates would be cut sharply and quickly, but these concerns were later alleviated by a series of stronger economic reports.

the signal of interest rate cut is becoming clearer

historically, the bond yield curve tends to slope upward as the maturity increases, with short-term yields generally lower than long-term yields, reflecting the higher risk of long-term loans. when short-term loans cost more than long-term loans, it means that investors expect the economy to improve in the next few years, so interest rates will be lower.

investors are increasing their expectations for a rate cut at the fed's meeting later this month. currently, swap markets fully expect the fed to cut rates by 25 basis points later this month. markets are pricing in a 40% chance of a 50 basis point cut. they are expecting a rate cut of more than 1 percentage point by the end of december.

federal reserve chairman jerome powell said at the jackson hole economic conference in august that the "time has come" for a u.s. interest rate cut.