Hong Kong yield curve: 10-year minus 2-year at 23bp, and what inversions have signalled

A yield curve spread compares what investors demand for lending for ten years with what they demand for two. When the long rate falls below the short one, many read it as a recession warning. Hong Kong’s history gives that reading a specific twist.

What is Hong Kong’s yield curve spread?

Hong Kong’s spread here is the 10-year government bond yield minus the 2-year Exchange Fund Note yield, both monthly averages. The 2-year comes from the HKMA’s Exchange Fund Bills and Notes series; the 10-year joins HKMA data to 2005 with ADB AsianBondsOnline (data: Bloomberg) from 2006.

A positive number means a normal, upward-sloping curve. Zero or below means inverted.

How flat is it now?

Hong Kong 10-year minus 2-year yield, September 2026 (3.71% minus 3.48%). Long-run average 101.7 bp

Visual guide

How flat is it now?

Spread

• September 202570.2 bp
• December 202555.1 bp
• February 202679.0 bp
• June 202642.4 bp
• August 202647.3 bp
• September 202623.4 bp

079

Month	Spread
September 2025	70.2 bp
December 2025	55.1 bp
February 2026	79.0 bp
June 2026	42.4 bp
August 2026	47.3 bp
September 2026	23.4 bp

Benchmark	Value
Average, November 1996 to September 2026	101.7 bp
Median	92.6 bp
Steepest	326.0 bp (January 2004)
Most inverted	−111.5 bp (November 1997)
Inverted months	36 of 359

The flattening in September came from the short end. The 2-year rose about 46 basis points in one month, from 3.02% to 3.48%, as markets priced the US rate increase of 16 September, while the 10-year rose 22.

Did past inversions come before a downturn?

Hong Kong publishes seasonally adjusted quarter-on-quarter GDP growth (C&SD table 310-31001). Matching inversions against it:

Inversion	Months	Deepest	What GDP did	Reading
October 1997 to January 1998	4	−111.5 bp	Contracted from Q4 1997 to Q4 1998	Arrived with the downturn
August to September 1998	2	−7.4 bp	Still contracting	Arrived during the downturn
May 2019 to February 2020	10	−14.6 bp	Contracted from Q2 2019 to Q2 2020	Arrived with the downturn
August 2022 to September 2023	14	−92.2 bp	−1.7% in Q3 2022, then growth through 2025	Arrived with a dip, missed what followed
November to December 2023	2	−22.4 bp	Growth	No downturn
April to July 2024	4	−10.9 bp	Growth	No downturn

None of these inversions gave advance notice. In 1997 the curve inverted as the HKMA pushed short rates up to defend the peg; in 2019 GDP was already falling in the quarter the inversion began, well before the pandemic deepened the contraction. The only contraction since 2022, −0.6% in the second quarter of 2026, came when the spread was around 40 basis points and positive.

Why US inversions show up in Hong Kong

The US 10-year minus 2-year spread was negative for 26 months, from July 2022 to August 2024 (FRED T10Y2Y, monthly average), the longest run since 1976, and the US did not enter recession.

Months in which Hong Kong's curve was also inverted during the July 2022 to August 2024 US inversion

Under the peg, Hong Kong dollar rates are tied to US dollar rates through arbitrage, so the curve largely imports its shape. The level correlation between Hong Kong’s spread and the US spread (GS10 minus GS2) is 0.94 from 2006 to September 2026, and 0.88 from 2016. In September 2026 the US spread was 34 basis points and Hong Kong’s 23. A flat Hong Kong curve is therefore first a statement about US rates, and only second about Hong Kong.

What does the 2-year minus the Base Rate say?

In many markets a 2-year yield well below the policy rate signals expected rate cuts. In Hong Kong that reading needs care. The Base Rate is set at the higher of the US target range lower bound plus 50 basis points, or average HIBOR. It is designed to sit above market rates.

Comparison	Gap
2-year September average (3.48%) minus Base Rate from 17 September (4.25%)	−77 bp
2-year September average minus Base Rate before 17 September (4.00%)	−52 bp
Months with the 2-year below the month-end Base Rate, September 1998 to August 2026	294 of 336

The 2-year was below the Base Rate in 88% of months, so a negative gap is the normal state. What it mostly tracks is the distance between HIBOR and US rates, which is set by liquidity in the Hong Kong dollar market, not by a local rate decision.

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