One of the US bond market’s most widely watched indicators of potential recession risk has reached levels last seen in 2007.
The yield on the benchmark 10-year Treasury note dropped as much as 10 basis points below the 2-year rate, eclipsing the 9.5-basis-point gap reached in early April. That occurred even as $33 billion of new 10-year notes are slated to be sold in an auction at 1 p.m. New York time, creating additional supply that can have a cheapening effect.
So-called inversions of the yield curve -- in which longer-term rates are below those on shorter-dated maturities -- are regarded as a potential harbinger of recession, and the spread between 2- and 10-year Treasuries is one of the most widely watched. The last time that segment of the yield curve was that inverted was in 2007, before the financial crisis of 2008-2009.
“Markets are focusing more on the idea that there might be a recession ahead of us,” said Jan Nevruzi, US rates strategist at NatWest Markets. “People don’t want to get ahead of the trend even though there’s supply coming.”
The current inversion comes amid increasing concern that measures taken by central banks worldwide to rein in inflation might end up driving the economy into recession. That fear has helped fuel a rebound in Treasury prices that’s taken the benchmark 10-year rate from around 3.5% in mid-June to around 2.93% on Tuesday. The two-year yield, meanwhile, was around 3.04%.
Other yield-curve spreads are also in flattening trends, though several remain positive, including the gap between those on 3-month bills and 10-year note. That spread, used by the New York Fed among others in recession-prediction models, stands at about 74 basis points, down from a multi-year high 234 basis points in May.
This article was provided by Bloomberg News.