The Treasury yield curve from five to 30 years inverted by as much as 20 basis points in US trading Thursday, a day after the two- to 30-year spread also became the most negative in more than two decades.
Shortly before the release of mixed US economic data stalled the trend, the five-year note’s yield rose almost eight basis points to around 3.68%, the highest since 2008 and 20 basis points higher than the 30-year bond yields at that time.
The curve had inverted by 18.5 basis points on June 14, previously the most since 2000, in a selloff unleashed by worse-than-expected inflation data that repriced expectations for how much the Federal Reserve was likely to raise its policy rate.
“Yield-curve flattening has been driven by hawkish central-bank rhetoric supported by stronger-than-expected CPI and resiliency in other growth data,” said Alex Li, head of US rates strategy at Credit Agricole, referring to the consumer price index. August levels released Sept. 13 reinvigorated the trend as they caused traders to price in more aggressive Federal Reserve action.
Treasury yields for two- to five-year notes have risen to multiyear highs this week. Longer-maturity yields have risen less as the prospect of Fed policy rates exceeding 4% fuels “market concerns about growth slowing down toward the end of this year or in early 2023,” Li said.
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The August CPI data led the market to fully price in another three-quarter-point rate increase on Sept. 21, the Fed’s next decision date, and to give some odds to a full-point increase. The US central bank has raised rates four times since March by a total of 2.25 percentage points in response to accelerating inflation. The rate hikes follow a two-year period when the lower bound was 0%.
Market-implied forecasts for the future path of the policy rate also reset to higher levels, with the anticipated peak in March surpassing 4.25%. In US trading Thursday it increased to about 4.45%. At the same time, the sequential forecasts are for the policy rate to decline by about half a point from its peak level next year, suggesting that economic conditions are likely to call for Fed rate cuts during that time frame.
Thursday’s inversion to 20 basis points was sustained only briefly amid mixed economic data including a steeper-than-expected drop in the Philadelphia Fed’s business outlook index for September.
This article was provided by Bloomberg News.