S. Ren in Bloomberg: “It’s getting flatter, prompting worries over an ‘asset famine’ and a prolonged recession.”

Whatever the reason, an inverted yield curve has a bad rap. In normal times, notes with longer maturities offer higher rates to compensate lenders for tying up their money for an extended period. When those yields sink close to or below shorter ones, it’s an indication that investors are pessimistic about an economy’s growth prospects. In the US, an inversion was a reliable predictor of recessions, at least in the pre-pandemic days.

Here’s a picture of the Chinese yield curve as of today:

Source: WorldGovernmentBonds.com.

There’s no inversion at maturities 1 year to 30. However, the 10yr-3mo spread is inverted.

Figure 1: Chinese year-on-year industrial production growth (black, left scale), and 10yr-3mo spread (blue, right scale). ECRI defined peak-to-trough recession dates shaded gray. Source: OECD, and author’s calculations.

Chinn and Ferrara (2024)

Keep reading this article on Econbrowser Blog - James Hamilton & Menzie Chinn.

Leave a Reply