The reversal of short- and long-term interest rates on U.S. government bonds hit the largest in 42 years since 1981 due to the hawkish (preferring monetary tightening) remarks by U.S. Federal Reserve Chairman Jerome Powell.
According to Bloomberg and Reuters on the 7th (local time), the yield on the two-year U.S. government bonds exceeded 5% on the same day, the highest level since 2007.
On the other hand, the 10-year interest rate remained below 4%.
The reversal of short- and long-term interest rates on U.S. government bonds widened to more than 1%, the first time since then-Fed Chairman Paul Volker raised interest rates at a super-fast pace in 1981 to offset double-digit inflation despite the recession.
Since July last year, long-term government bond rates have not kept up with the two-year government bond rate.
In general, long-term bonds have higher interest rates than short-term bonds. This is because the longer the repayment period, the higher the risk.
However, if short-term government bond rates exceed the long-term, it means investors expect the Fed to ease monetary policy again after the short-term rise in interest rates and rising borrowing costs hurt the economy. Therefore, the reversal of short- and long-term interest rates is usually regarded as a sign of an economic recession.
As Powell made hawkish remarks at a hearing of the U.S. Senate Banking Committee, including a 0.5 percentage point hike in the benchmark interest rate and a possibility of raising the interest rate (final interest rate), the gap in short- and long-term interest rates already reversed widened.
According to the Chicago Mercantile Exchange (CME) FedWatch, the outlook for a rate hike in the Federal Open Market Committee (FOMC) meeting to be held from the 21st to 22nd after Powell’s remarks in the Federal Fund Rate (FFR) futures market was reversed.
On the previous day, the probability of a 0.25 percentage point increase (68.6%) exceeded the probability of a 0.5 percentage point increase (31.4%), but the probability of a 0.5 percentage point increase (69.8%) surpassed the probability of a 0.25 percentage point increase (30.2%).
Since 1981, when the short- and long-term reversal interest rate gap was the largest ever, the U.S. economy suffered its worst recession since the Great Depression until November 1982.