Traders work on the floor of the New York Stock Exchange (NYSE) in New York City, U.S. January 10, 2022. REUTERS/Brendan McDermid/File Photo
NEW YORK, March 29 – A closely watched section of the US Treasury yield curve inverted on Tuesday for the first time since September 2019, reflecting market concerns that the Federal Reserve could plunge the economy into recession , while battling rising inflation .
For a brief moment, the yield on the 2-year government bond was higher than that on the benchmark 10-year bond. This part of the curve is seen by many as a reliable signal that a recession could be coming in the next year or two.
The 2-year and 10-year spread briefly fell to minus 0.03 basis points before recovering above zero to 5 basis points, according to data from Refinitiv.
While the brief inversion in August and early September 2019 was followed by a downturn in 2020, nobody foresaw the closure of businesses and economic meltdown due to the spread of COVID-19.
Investors now fear that the Federal Reserve will dampen growth as it aggressively hikes interest rates to combat rising inflation, amid downward pressure on prices at its fastest rate in 40 years.
“The movement in the twos and tens reflects that the market is becoming increasingly nervous that the Fed may fail to promote a soft landing,” said Joe Manimbo, senior market analyst at Western Union Business Solutions in Washington.
Western sanctions imposed on Russia following its invasion of Ukraine have led to renewed volatility in commodity prices and added to already high inflation.
Fed fund futures traders expect the Fed’s interest rate to rise to 2.60% by February, up from 0.33% today. FEDWACH
Some analysts say the Treasury yield curve has been distorted by the Fed’s massive asset purchases, which are keeping long-term yields low relative to short-term ones.
Short- and intermediate-term yields have skyrocketed as traders continue to price in more rate hikes.
Another part of the yield curve, also monitored by the Fed as a recession indicator, remains far from inversion.
That’s the 3-month, 10-year portion of the curve, currently at 184 basis points.
In any case, the lag from an inversion of the two- to ten-year part of the curve to a recession is typically relatively long, meaning that an economic downturn is not necessarily a concern at this time.
“The time lag between an inversion and a recession is typically between 12 and 24 months. Six months was the shortest and 24 months was the longest, so it’s really not something the average person can do,” said Art Hogan, chief market strategist at National Securities in New York.
Meanwhile, analysts say the US Federal Reserve could use roll-offs of its massive $8.9 trillion bond holdings to steepen the yield curve again if it worries about the slope and its impact.
The Fed is expected to start reducing its balance sheet in the coming months.
Reporting by Chuck Mikolajczak and Karen Brettell; Additional reporting by John McCrank; Edited by Alden Bentley and Nick Zieminski