Last Friday, the yield of US 10Y treasury bonds dropped rapidly 10BP to 2.44%, which led to the first inversion of the yield of US 10 and March since 2007. There are two main triggering factors: First, the March manufacturing PMI data of Germany and France (44.7% and 49.8% respectively) released on March 22 were significantly less than expected, and the subsequent PMI data of Markit manufacturing in the United States (52.5%) was also less than expected, igniting global risk aversion and opening a risk-averse mode, and investors bought government bonds in succession; Another factor is that on March 20th, the Federal Reserve announced a monetary policy resolution that exceeded the dove's expectations, greatly reducing the original expectation of raising interest rates twice to zero. Bond investors speculate that the Fed has observed signs of a rapid economic downturn and started to cut interest rates next year. The crowded trading of government bonds has led to a rapid decline in long-term yields.

Interest rate inversion is the leading indicator of American economic recession.

Since 1953, the United States has experienced nine economic recessions, and before each recession, there was a phenomenon of interest rate inversion. From the historical data, there is a high probability of economic recession within two years after the phenomenon of interest rate inversion. The time interval from interest rate inversion to economic recession is usually 7 to 23 months. The phenomenon of interest rate inversion has successfully predicted nine economic recessions in the United States since 1955. The only exception occurred in the middle of 1960s. After that phenomenon, there was no recession in the United States, but the economic growth rate also declined.

Why is interest rate inversion an indicator of economic decline or even recession?

First of all, the laws of the economic cycle have caused this situation. Long-term interest rates reflect future economic growth prospects and inflation expectations. When the economic growth prospects deteriorate, long-term interest rates enter a downward track. At this time, it is generally in the late stage of economic expansion, and the next stage is economic recession. Predicting economic recession with upside-down interest rates can be said to be the self-realization of market expectations. Second, it is related to the bank's profit model. Banks borrow short-term funds and then lend them to enterprises with long-term projects, and the short-term and long-term spreads narrow, which means that the profit margin of banks is thinner and the willingness of banks to lend is weakened. Long-term and short-term spreads have a negative impact on the macro-economy through credit channels.