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‘Stagnation Signal’: Long-Term Interest Rate Inversion Continues… Slowing Growth Concerns

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In September of this year, the difference between short-term and long-term interest rates reversed… 14 years
Concerns about economic slowdown reflected in central bank tightening

Bank of Korea Governor Lee Chang-yong explains the results of the monetary policy meeting at a press conference following the plenary meeting of the Monetary Policy Committee held at the Bank of Korea in Chung-gu, Seoul on the morning of November 24. At the meeting, MPC raised the base interest rate from the current 3.00% per annum to 3.25% per annum by 0.25 percentage points.

The inverted interest rate differential, which is considered “a sign of an economic downturn”, continues.

According to the Korea Financial Investment Association on the 29th, the 3-year Treasury bond yield rose 0.025 percentage points from the previous day to 3.669% on the previous day, but the 10-year bond yield fell 0.017 percentage points from the previous day afternoon. up to 3.606% per year. The yield on 3-year bonds is higher than the yield on 10-year bonds, and this has been going on since the 21st.

The phenomenon where 3-year Treasury yields are higher than 10-year yields began on September 22, when the 3-year yield was 4.104% per annum, higher than the 10-year yield of 3.997% per annum. This is a phenomenon that appeared about 14 years later from July 2008.

Typically, current monetary policy is reflected in short-term interest rates, such as 3-year KTB, while economic fundamentals (underlying conditions) are reflected in long-term interest rates, such as 10-year KTB. Generally, the longer the maturity, the higher the interest rate as the risk increases before maturity.

However, 3-year Treasury yields are analyzed to have risen faster as the Bank of Korea, together with the US Federal Reserve, recently raised its base rate quickly. In addition, market participants are believed to have a bleak outlook on the future as economic growth slows down due to rising interest rates and monetary tightening is expected to continue.

This phenomenon is likely to continue in the future. The Bank of Korea recently cut its previous forecast from 2.1% to 1.7%, and the Korea Development Institute (KDI) also cut its previous forecast from 2.3% to 1.8%.

In addition, the Bank of Korea plans to raise its base rate next year to 3.50-3.75%, and US Federal Reserve officials are also putting forward their position that they will continue to raise interest rates. Analysts say that as major central banks continue to tighten monetary policy to control inflation, slowdown fears will eventually grow and long-term and short-term interest rate inversions are likely to continue.

Cho Yung-gu, a researcher at Shinyoung Securities, said: “The prospect of excessive tightening of monetary policy dissolves in the short-term interest rate, and the expectation that economic growth will be sluggish dissolves in the long term. -term interest rate. Water tariffs are inverted,” he said.

Reporter Lee Young-woo [email protected]

Source: Economist

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