KUALA LUMPUR (Nov 27): Citing the inversion of the yield spread between the 10-year and two-year US Treasury (10-2Y UST) rates, a banker and fund managers said the US may still fall into a recession in the next six months.
The 10-2Y UST yield spread, which has been inverted since mid-2022, is seen as an indicator signalling a coming recession within a 24-month period, according to Hong Leong Investment Bank Bhd head of Treasury and Markets Chong Poh Choon.
“Interestingly, we are actually at 17 months [since the yield spread inverted], so we probably have another six months to see whether this hypothesis is correct," he said during a panel discussion at the MARC Malaysian Bond & Sukuk Conference 2023: Sustainable Transition to a Greener Economy on Monday (Nov 27).
“Assuming the hypothesis is correct, there’s a recession going to a rate cut. So the yield curve will have to steepen — dragging down short-dated bonds,” he added
On the other hand, the term structure of interest rates — the relationship between interest rates or bond yields and different terms or maturities — should normalise if the hypothesis is incorrect, according to Chong.
“Overall, the conclusion is I personally see both the US and our government securities' yield curves to steepen into 2024,” he said.
AXA Investment Management chief investment officer Ramkumar Rasaratnam concurred that the inverted 10-2Y UST yield spread points towards an impending recession, but noted that the unemployment rate and payroll numbers are also key economic indicators to closely watch.
“When we look at recessions in the past, for example in the US, the unemployment rate accelerates very quickly, from very low to very high, or from very high to very low.
“But based on what’s priced at the moment [in the markets] based on general consensus forecast is a soft landing, which is generally no recession and a return to normality next year,” he said.
Meanwhile, Maybank Asset Management Sdn Bhd head of Fixed Income Ben Eeh said the current state of the global economy going into next year gives him a sense of deja vu with interest rates seemingly peaking again, inflation cooling, advanced economies' growth slowing and the risk of a hard landing in the US.
However, Eeh said he is positive on Asian equity, citing its cheap valuation, and currencies because he believes the basket underperformed in 2023, adding that there will be more support from investment inflow.
“I think we (Maybank Asset Management) are more constructive for next year, we are long-term on dollar bonds, and we think there will be more than just income from yield, it will come from price appreciation.
“It could potentially hit double digits next year if it turns out exactly as what the market is expecting — pricing in four rate cuts to the US Federal Funds Rate of 100 basis points next year,” he said.
“I think there is good potential [that] we can have a very good return next year,” he added.