NEW YORK/LONDON: The US Treasury yield curve, as measured by the gap between five and 30-year yields, briefly inverted on Monday for the first time since early 2006, as a sell-off in the bond market resumed, raising concerns about the risk of recession.
Investors pay closer attention to the US 2/10 year yield curve for recession signals, but the 5/30 inversion has increased the chances of the former inverting as well.
The US 2s/10s yield curve was last at 12.8 basis points , the flattest since March 2020.
The 2/10 inversions have preceded the last eight recessions, including 10 of the last 13, according to BoFA Securities in a research note.
US five-year yields jumped to 2.673%, their highest since December 2018, while 2-year yields, which are closely tied to the Federal Reserve’s rate outlook, soared to their strongest level since mid-April 2019. Yields on longer-dated maturities, on the other hand, such as US 10-year notes and 30-year bonds declined.
While parts of the yield curve, namely US 5/10 and US 3/10 inverted last week, the slide of the gap between five- and 30-year maturities of the biggest bond market in the world into negative territory raised concerns the Fed’s hawkish approach to tackling inflation might hurt growth.
That said, some in the market were less worried about the implications of an inverted curve. Inversions, specifically in the US 2/10 and US 3-month/10-year, typically are considered a harbinger of eventual recession.
“An inverted curve, no matter the maturities involved, is not very good at predicting the timing of recessions—historically, recessions follow inversions with long and variable lags,” said Dave Wagner, portfolio manager of Aptus Capital Advisors.
“What’s more, stock prices tend to appreciate between curve inversions and recessions, and sometimes a lot. It definitely doesn’t pay to be too pessimistic as soon as the curve invert.”
The spread between 30- and five-year US Treasury yields fell to as low as minus 7 basis points (bps), moving below zero for the first time since February 2006, according to Refinitiv data. That spread was last flat at 1 basis point.
The spread has collapsed from a positive 53 basis points at the start of this month.
Also on Monday, the US Treasury held auctions for US 2-year and 5-year notes, with mixed results. The US 2-year sale’s high yield of 2.365%, was higher than the expected rate at the bid deadline, suggesting that investors demanded a higher premium to buy the note.
The 2-year note auction’s bid-to-cover ratio, a gauge of demand, was 2.46, the lowest since Nov 22, 2021.
The US five-year note auction, on the other hand, was a different story. The note saw a high yield of 2.543%, lower than the expected rate at the deadline, while the bid-to-cover ratio was 2.53, the highest since Oct. 27 last year.
In the overnight index swaps (OIS) market, the yield curve between two and 10-year swap rates inverted for the first time since late 2019 and last stood at minus 4.7 basis points.
The OIS market reflects traders’ rate expectations and like Treasuries, has a yield curve that plots interest rates from short-term to long-term maturities. Some analysts say the OIS curve is a better indicator of incoming recessions than Treasuries. The OIS looks at the short- and long-term path of the fed funds rate, the purest risk-free rate banks charge each other for overnight loans to meet reserves required by the US central bank. The five-30 year OIS curve had already inverted earlier in March and various parts of the forwards curve have also inverted. since mid-April 2019. It was last up 2.2. basis points 2.323%.
US benchmark 10-year yields pushed above the 2.5% marker to 2.55%, hitting their highest since April 2019, but were last down 3 basis points at 2.460%.
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