The yield on the 2-year Treasury note is at risk of rising further above its 10-year counterpart, deepening an inversion of that closely followed part of the yield curve and exacerbating the debate over whether the U.S. economy is headed for recession.
The differential, or spread, between 10- BX:TMUBMUSD10Y and 2-year
yields, which is usually positive, sank to as low as minus 10 basis points before steadying around minus 3 basis points on Monday.
B. of A. Securities rate strategist Bruno Braizinha says he and his colleagues expect the 2-year/10-year spread to shrink to minus 50 basis points by year-end, and that the extent of inversion will be driven by how much the Federal Reserve lifts interest rates above the so-called neutral level, seen as neither accommodative nor restrictive.
The risk of a more deeply inverted 2s/10s curve comes as the counterpart spread between 5-
and 30-year rates
also briefly shrunk to as little as minus 15.8 basis points overnight.
Meanwhile, some investors are raising doubts about whether a U.S. economic downturn is actually on the way: Mark Haefele, chief investment officer at UBS Global Wealth Management, said, “our base case remains that the U.S. economy can avoid a recession.” Portfolio manager Scott Ruesterholz of Insight Investment, which oversees $1.1 trillion in assets, say the risk of a recession in 2022 is “very low.”
“Simply put, market participants do not believe that the inversion is necessarily a harbinger of a recession,” said Marc Chandler, chief market strategist at Bannockburn Global Forex. However, “arguing against the significance of the inversion does not mean that the U.S. economy is not headed for a recession,” he said in a note.
Yield curve inversions have typically preceded every recession since the 1950s, according to Principal Global Advisors, albeit with a lag that could take anywhere from a matter of months to a few years. There’s debate, though, over which measure of the curve is best to look at: Fed Chairman Jerome Powell has pointed to the spread between yields in the first 18 months of the curve, while others cite the gap between
note, which has generally been steepening.
Bannockburn’s Chandler cites commentary from former New York Fed President Bill Dudley, titled, “The Fed Has Made a U.S. Recession Inevitable,” which was released before the 2s10s inverted last week. In it, Dudley said that the Fed is not only behind the curve on controlling inflation, but that “a hard landing” is “virtually inevitable.”
The last time either the 2s/10s or 5y/30y spread inverted by 50 basis points or more was in 2000. And as of Monday, the 2s/10s and 5s/30s spreads were still a long way from their deepest inversions on record, which took place in 1980, according to data going back to 1977 from Dow Jones Markets Data.
An aggressive selloff in Treasurys across the board pushed yields higher on Monday, with the 2-year rate up at around 2.44% and the 10-year rate hovering around 2.41%.