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Is inverted yield curve harbinger of economic recession?

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Seen above is an empty shopping street in Myeong-dong, central Seoul, Tuesday. Yonhap
Seen above is an empty shopping street in Myeong-dong, central Seoul, Tuesday. Yonhap

By Lee Min-hyung

With the three-year treasury yield here surpassing that of the 10-year yield, concerns are rising that the economy is entering a phase of recession.

According to data from the Korea Financial Investment Association, the three-year treasury yield came in at 3.669 percent on Monday, up 0.025 percentage point from a day earlier. But the 10-year yield reached 3.606 percent, down by 0.017 percent during the same period.

It is a rare case for the three-year yield to top the 10-year figure. Of particular note is that this has stayed in place for six consecutive days since Nov. 21.

Given that the phenomenon is often considered a sign of recession, market analysts said the economy is on track to enter a downturn.

"Monetary authorities here and abroad are still paying special attention to stabilizing prices, but even after taking into consideration that they will stay in a cycle of rate hikes until the first quarter of next year, the long-term yield's fall appears too steep," Gong Dong-rak, an analyst at Daishin Securities, said.

"The inverted yield curve looks sharper than expected, which shows that expectations for recession are deeply reflected," the analyst said.

The three-year yield has been on the rise on hopes for additional rate hikes, while that of the 10-year yield declined in reflection of the dim outlook for the economy.

The first time when the yield curves started inverting was on Sept. 22, July 2008. At that time, the three-year yield soared to more than 4 percent, topping that of the 10-year yield by 0.107 of a percentage point. This overlaps the timeline when the U.S. Fed pushed for its third giant rate hike of 75 basis points.

The curves had been inverted from time to time for about two weeks since then. But this took place again recently.

Monetary authorities and financial institutions are also revising down Korea's GDP growth forecast. The Bank of Korea cut Korea's 2023 GDP growth projection down to 1.7 percent from an earlier forecast of 2.1 percent, citing global economic slowdown and the effect from a steep set of rate hikes.

Other authorities and private financial institutions are also sending a more conservative forecast on the nation's economic growth next year. The OECD also recently revised the GDP forecast down to 1.8 percent from an earlier outlook of 2.2 percent. The Korea Development Institute also expected the figure to reach 1.8 percent next year, cutting down its earlier forecast by 0.5 of a percentage point.

Fitch Ratings also forecast the economy to grow by 1.9 percent in 2023, and Hana Institute of Finance presented the GDP growth forecast at 1.8 percent.

"Chances are the long-term yield may extend additional losses on growing fears of recession," Kim Wan-joong, a researcher at Hana Institute of Finance, said.

Lee Min-hyung

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