U.S. Yield Curve Inversion Deepens to 1%
After Jerome Powell told the House Financial Services Committee that the Fed might keep raising interest rates, the gap between yields on 2-year and 10-year Treasuries—which has inverted before each of the past five U.S. recessions—reached the largest inversion since March.
Bond investors’ concern over a potential U.S. recession deepened after Federal Reserve Chair Jerome Powell signaled that policymakers may keep pushing interest rates higher.
Yields on 2-year Treasuries exceeded those on 10-year notes by as much as 1 percentage point on Wednesday, after short-term rates climbed following Powell’s testimony in Congress. The 2-10 segment of the yield curve—which has inverted before each of the past five U.S. recessions—is now the most inverted since March.
The impact of Powell’s testimony may have been exacerbated by higher-than-expected UK inflation data, which added to speculation the Bank of England will increase the pace of its tightening when it meets Thursday. A number of developed central banks turned more hawkish this month on concern inflation is staying too high for too long.
“The UK is sending the signal that it’s too early to make the call that central-bank rate hikes have been enough to keep the inflation genie in the bottle,” said Prashant Newnaha, a rates strategist at TD Securities Inc. in Singapore. “In the battle of growth versus inflation, inflation wins hands down, meaning that central banks are likely to risk a severe downturn to win the inflation battle.”
While the Fed kept interest rates on hold last week for the first time in more than a year, it surprised investors and economists by projecting it’s likely to raise borrowing costs twice more by year-end. Powell reiterated that message in congressional testimony Wednesday, stressing that most U.S. policymakers expect more hikes will be needed with inflation remaining well above the Fed’s 2 percent target.
The inversion of the 2-10 spread had widened to 111 basis points (bps) on March 8, the most since the 1980s, before narrowing later that month as the collapse of several U.S. regional lenders fueled speculation that a potential banking crisis would convince the Fed to start cutting rates.
—With assistance from Liz Capo McCormick.
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