Sign up now for FREE unlimited access to Reuters.com Register June 13 (Reuters) – US two-year bond yields rose above 10-year borrowing costs on Monday – the so-called reversal of a curve that often heralds a recession – amid expectations that interest rates could rise faster and faster than expected. Fears that the US Federal Reserve could choose to raise interest rates even further than expected this week to curb inflation have pushed two-year yields to their highest levels since 2007. But there is also the view that aggressive interest rate hikes could lead the economy into recession. Sign up now for FREE unlimited access to Reuters.com Register The Ministry of Finance’s two- and 10-year performance gap narrowed to less than 2 basis points (bps) before rising again to around five bps, according to Tradeweb. The curve was reversed two months ago for the first time since 2019 before normalizing. The reversal of this part of the yield curve is seen by many analysts as a credible signal that the recession could come in the next year or two. The move follows reversals on Friday in the three-year / 10-year and five-year / 30-year sections of the Treasury Department curve, as data showed that US inflation continued to accelerate in May. Performance curve Yields on the two-year bond rose to a 15-year high of around 3.25% before falling to 3.19%, while 10-year yields reached the same level, the highest since 2018. Friday’s data showed the biggest annual rise in US inflation in nearly 40-1 / 2 years, disproving hopes that the Federal Reserve could halt its interest rate hike in September. Many believe that the central bank may indeed need to accelerate the pace of tightening. Barclays analysts said they now expect a 75 bps move from the Fed on Wednesday instead of the previous 50 bps. Money markets are now pricing cumulative 175 bps increases by September and also have a 20% chance of 75 bps this week, which if implemented would be the largest increase in a session since 1994. UBS strategic analyst Rohan Khanna said that the European Central Bank’s aggressive communication along with inflation “completely made the idea that the Fed may not deliver 75 bps or that other central banks will move at a gradual pace.” “The whole idea came out in the wave … then you get the turbocharger leveling curves. it is also not behind us, “Khanna added. Meanwhile, bets on the US terminal rate – where the Fed’s fund rate could peak in this cycle – are changing. On Monday, they billed interest rates to approach 4% in mid-2023, up almost one percentage point from the end of May. Deutsche Bank said it now saw interest rates peak at 4.125% in mid-2023. Some Fedwatchers are skeptical that the Fed will move faster with interest rate hikes. Pictet Wealth Management senior economist Thomas Costerg noted, for example, that most inflation factors, such as food and fuel, remain beyond the control of central banks. “During the summer, they will know the growth data and housing that is starting to look more volatile,” Costerg said. “I doubt they will do 75 bps … 50 bps is already a big step for them.” Bond sell-offs have pushed other markets to the brink, pushing 10-year German yields to their highest levels since 2014 and lowering S&P 500 futures by 2.5%. Sign up now for FREE unlimited access to Reuters.com Register Report by Yoruk Bahceli and Sujata Rao Edited by Dhara Ranasinghe and Mark Potter Our role models: The Thomson Reuters Trust Principles.
