A Massive Sell-off Is Causing Havoc, The Yield Curve Inverts In The Treasury Markets In The US

On Monday, two-year Treasury yields surpassed 10-year borrowing prices. This so-called curve inversion generally precedes the US’s economic downturn, anticipating that interest rates will climb quicker and higher than expected.

Fears that the US Federal Reserve might opt for a more significant rate hike this week to keep inflation in check pushed two-year rates to their highest levels since 2007.

However, a growing consensus is that excessive rate hikes could tip the economy into recession.

According to Tradeweb pricing, the spread between two and 10-year Treasury rates fell to minus two basis points (bps) before recovering to roughly five bps.

What Experts Predict?

The curve reversed for the first time since 2019 two months ago before normalizing. Many analysts consider an inversion of this portion of the yield curve to be a strong indicator that a recession is on the way in the next year or two.

After statistics showing U.S. inflation continued to accelerate in May, inversions in the three-year/10-year and five-year/30-year parts of the Treasury curve occurred on Friday.

Two-year Treasury yields climbed to a 15-year high of roughly 3.25 percent before falling to 3.19 percent, while 10-year yields climbed to their highest level since 2018.

The highest annual increase in U.S. inflation in over 40-and-a-half years was reported on Friday, putting an end to hopes that the Federal Reserve will suspend its rate hike campaign in September. Many believe the central bank will need to accelerate its rate of tightening.

Analysts at Barclays stated they are now optimistic about the future.

Money markets are now pricing 175 basis points in hikes by September, with a 20% likelihood of a 75 basis point hike this week, which would be the most considerable single-meeting boost since 1994 if realized.

According to Reuters, The hawkish European Central Bank communication, together with the inflation print, “has utterly broken this assumption that the Fed may not deliver 75 basis points or that other central banks will move at a steady pace,” according to a UBS strategist Rohan Khanna.

“When the idea goes down the drain, yield curves flatten out in a turbo-charged manner. It’s just a realization that peak inflation in the United States isn’t over yet, and unless we’re informed otherwise, peak Fed hawkishness isn’t either, “Khanna continued.


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Subhashree Panda

Subhashree has a Master's in Robotics and is fascinated by artificial intelligence. She covers the latest advancements in AI, machine learning, and robotics. Subhashree is also a robotics hobbyist and enjoys building small robots in her free time.