Yields rose immediately following the announcement, before backtracking as Fed Chair Jerome Powell expressed some flexibility about future cuts during a press conference. The two-year yield, which reflects market expectations of interest rate policy, had initially risen on the signalled pause in easing. It was last down 3.6 basis points at 1.606%, with the 10-year yield down 6.2 basis points at 1.772%.
The spread between the two- and 10-year yields narrowed to as little as 14.8 basis points, the tightest since mid-October, before widening to 16.4 basis points. Market participants disagreed about whether the yield curve would invert again, after doing so in August for the first time since 2007. An inversion is a classic economic indicator that has preceded every recession for the past 50 years. In some instances the yield curve has inverted more than once before a downturn.
"It's definitely possible," said Gene Tannuzzo, senior portfolio manager at Columbia Threadneedle Investments. "If the data continue to deteriorate, the long end will follow the data lower. And if the Fed doesn't react then we'll invert," he said. He noted that during the Fed meetings in July and September, the 10-year note yield peaked, suggesting more declines are possible. Although more flattening could be expected, said Jones, she did not believe the curve would invert because US economic data is unlikely to deteriorate to that degree.