Yields on US 10-year Treasury bonds jumped to 12-year highs on Friday and 2-year yields were the highest since 2007 as investors fear central banks around the world will continue to tighten policy. monetary policy to deal with rising inflation.
The 2-year yield reached 4,270%, its highest level since October 2007. The five-year yield ticked at 4,084%, the highest since November 2007, and the benchmark 10-year yield jumped to 3,829%, the highest since April 2010.
“We’re weighing in on the reality that we’re entering the next phase of global tightening,” said Ian Lyngen, head of US interest rate strategy at BMO Capital Markets in New York.
Treasury yields rose in tandem with those on British government bonds on Friday, which soared after Britain’s new finance minister, Kwasi Kwarteng, unleashed historic tax cuts and a huge increase in borrowing.
This came a day after the Bank of England raised its interest rate by 50 basis points, to 2.25%, and said it would sell around 8.7 billion pounds ($9.8 billion) of government bonds in the latest quarter. from 2022, becoming the first major central bank to initiate active sales.
The Federal Reserve raised interest rates by 75 basis points on Wednesday, with Fed Chairman Jerome Powell vowing that he and his colleagues will “continue” their battle to reduce inflation.
The bond curve inverts to a level not seen in two decades
As rates rise, so do concerns about how they will affect growth and risk assets.
“That’s going to have significant ramifications for US risk assets, we just haven’t seen it yet,” Lyngen said. “I suspect we are looking at a recalibration of expectations going forward that will ultimately end with a flatter curve, or deeper investment in the US and risk assets under pressure.”
The spread of the yield curve between 2-year and 10-year bonds hit -58 basis points on Thursday, a negative spread means a curve inversion, that is, short-term bonds (2 years) have a higher yield long-term (10 years).
Typically, the longer the maturity of the bond, the higher the yield. It is like a reward to investors for waiting time. But seeing a risk in the short term, 2-year bonds outperform longer-dated bonds.
The current inversion of the yield curve is the largest in at least two decades, indicating investors’ fear of an impending recession in 8 to 24 months, at least that is what has happened, every time the curve is inverted, on at least 8 previous occasions since the 1960s.
With information from Reuters.
