NEW YORK: Two-year yields hit 15-year highs on Friday and the yield curve inversion deepened as investors fretted that central banks globally will keep tightening monetary policy to tackle soaring inflation.
“We are pricing into the reality that we’re entering the next phase of global tightening,” said Ian Lyngen, head of US rates strategy at BMO Capital Markets in New York.
Treasury yields rose in tandem with British government debt yields on Friday, which jumped after Britain’s new finance minister Kwasi Kwarteng unleashed historic tax cuts and huge increases in borrowing.
That came a day after the Bank of England raised its key interest rate by 50 basis points to 2.25% and said it would sell around 8.7 billion pounds ($9.8 billion) of government bonds in the final quarter of 2022, becoming the first major central bank to begin active sales.
The Federal Reserve on Wednesday hiked rates by 75 basis points and Fed Chairman Jerome Powell vowed that he and his fellow policymakers would “keep at” their battle to beat down inflation.
“The Fed remains committed to price stability even at the risk of a recession,” analysts at TD Securities said in a report, adding that “we think that long-end Treasury rates look attractive and expect the curve to continue flattening.”
Fed officials also forecast a higher rate path than expected, with the “dot plot” showing its policy rate rising to 4.40% by the end of this year before topping out at 4.60% in 2023.
As rates rise, concerns about how they will impact growth and risky assets are also increasing.
Yields on 10-year Treasury Inflation-Protected Securities (TIPS), which account for expected inflation and are known as real yields, reached 1.426% on Friday, the highest since February 2011.
“That’s going to have meaningful ramifications for US risk assets,” said Lyngen. “I suspect that we’re dealing with a recalibration of forward expectations that will ultimately end with a flatter curve, or a deeper inversion in the US, and risk assets under pressure.”
The inversion in the yield curve between two-year and 10-year notes reached minus 58 basis points on Thursday, the most inverted in at least two decades, and was last at minus 52 basis points, indicating fears about an impending recession.
The three-month, 10-year part of the yield curve, however, which is also closely watched by Fed officials as a recession indicator, has remained in positive territory. It steepened to 49 basis points on Friday and is up from 22 basis points on Wednesday.
Two-year yields reached 4.270%, the highest since October 2007. Five-year yields hit 4.084%, the highest since November 2007 and benchmark 10-year yields jumped to 3.829%, the highest since April 2010.
The Treasury will sell $123 billion in coupon-bearing supply next week, including $43 billion in two-year notes on Monday, $44 billion in five-year notes on Tuesday and $36 billion in seven-year notes on Thursday.
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