Another key measure of Treasury yield curve nears inversion, underlining recession fears

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Treasury yields rose on Monday, with the 2-year Treasury bill rate close to ten, threatening to reinvest the yield curve and underscoring fears that persistently hot inflation would require the Federal Reserve to cut rates so aggressively that it will drive the economy into recession.

What are the yields doing
  • The performance of the 10-year Treasury note TMUBMUSD10Y,
    was 3.271%, compared to 3.156% on Friday at 3 p.m. Eastern time. Friday’s level was the highest since November 9, 2018, according to Dow Jones Market Data. Debt yields and prices move opposite each other.

  • The performance of the 2-year Treasury note TMUBMUSD02Y,
    was 3.204% compared to 3.047% on Friday afternoon, the highest level at 3:00 pm since December 31, 2007.

  • According to FactSet, the spread between 10 and 2-year banknotes narrowed to just 0.24 basis points early Monday. Propagation was reversed briefly in late March and early April. Meanwhile, the 5- and 30-year spread was reversed to minus 16 basis points.

  • The yield on 30-year Treasury bonds TMUBMUSD 30Y,
    it rose to 3.256% from 3.195% late Friday.

What is driving the market

The yield curve tends to lean higher as investors take into account the brighter economic outlook and demand higher returns to maintain long-term Treasury bonds. Curve investments may reflect fears about the prospects for economic growth. An extended reversal of the 2/10 year measure of the curve is considered a reliable recession warning sign, albeit with a delay.

Federal Reserve policy makers are meeting Tuesday and Wednesday and the federal funds rate is expected to rise by at least 50 basis points, or half a percentage point. Some economists and traders are thinking about the prospect of a 75 basis point move after data released on Friday showed that the consumer price index rose 1% monthly in May and pushed the annual inflation rate to 8.6%, at 40 years old. high after a moderate slowdown in April.

See: “Pigeons don’t exist at FOMC right now”: economists expect Fed meeting with hawks this week

The sale of Treasurys is accompanied by a sharp drop in shares. US stock indexes fell sharply last week, including a fall after the CPI on Friday. The top three U.S. stock indices opened sharply lower on Monday, with the Dow industrial sector falling more than 670 points and the S&P 500 falling in bearish territory, in line with global equities sales.

What analysts say

“The US CPI data was not much worse than expected, but the market was overinvested in the idea that inflation has peaked,” said Kit Juckes, global macro strategist at Société Générale. in a note.

“We’re still seeing waves of price pressure crashing through the economy one after the other, and while each wave may be ‘transient,’ they keep coming and will do so until U.S. demand it has significantly softened, “he wrote. “The policy challenge is that the Fed has no idea how much monetary hardening is needed and will only find out that it has done too much, long after the event. And we know what happens then.”

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