Huge Sell-offs Hit Treasury Markets: Recession Looms

On Monday, US two-year Treasury yields surpassed 10-year borrowing costs, signaling a so-called curve inversion, which often precedes an economic downturn, on expectations that interest rates will rise faster and further than expected, Yoruk Bahceli and Sujata Rao reported for Reuters.

Photo Insert: Two-year Treasury yields reached a 15-year high of around 3.25 percent before falling to 3.19 percent, while 10-year yields reached a 15-year high of 3.25 percent, the highest since 2018.

Fears that the US Federal Reserve may opt for a larger rate hike than expected this week to combat inflation have pushed two-year yields to their highest levels since 2007. However, there is a growing concern that aggressive rate hikes will send the economy into recession.

The spread between two and ten-year Treasury yields fell to minus two basis points (bps) before rising back to around five bps, according to Tradeweb prices.

The curve inverted for the first time since 2019 two months ago before normalizing. Many analysts believe that an inversion of this part of the yield curve is a reliable indicator that a recession will occur within the next year or two.

The move comes after Treasury curve inversions in the three-year/10-year and five-year/30-year segments on Friday, after data showed that US inflation continued to accelerate in May.

Two-year Treasury yields reached a 15-year high of around 3.25 percent before falling to 3.19 percent, while 10-year yields reached a 15-year high of 3.25 percent, the highest since 2018.

The largest annual increase in U.S. inflation in nearly 40-1/2 years was reported on Friday, dashed hopes that the Federal Reserve would pause its rate hike campaign in September. Many believe the central bank will need to accelerate its tightening.

According to Barclays analysts, the Fed will now move by 75-basis points on Wednesday, rather than the 50-basis points that had previously been assumed. Money markets are now pricing in a total of 175-basis points in hikes by September, with a 20 percent chance of a 75-basis point move this week, which if implemented would be the largest single-meeting hike since 1994.

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