The two-year Treasury yield premium over that of benchmark 30-year bonds rose to a level not seen this century after short-end rates extended their rise as US consumer price inflation data released this week was higher than anticipated.
The two-year yield was up to 35 basis points above the 30-year rate on Thursday, sending the yield curve inversion past the depths reached in August, to levels last seen in 2000.
The two-year Treasury rate rose 23 basis points this week to 3.79%, amid expectations that the Federal Reserve will need to continue to tighten monetary policy quickly to curb inflation. The 30-year yield has risen less than two basis points in the same period to 3.46%.
“The curve is flattening more and the hard landing scenario is a bigger risk after the inflation data,” said John Madziyire, portfolio manager at Vanguard. “Further rate cuts are being priced in from 2023 to 2024,” based on interest rate futures, he added.
Treasury curve reversals are closely watched indicators that are seen by many as a potential harbinger of economic distress. The gap between the 2-year and 30-year yields marks the difference between those of the longest and the shortest ordinary US benchmark bonds, although others—such as the gap between the 5-year and 30-year yields and the spread between the 2-year and 10 years—are generally followed more closely. The 10-year yield was little changed at 3.41%.
Traders, via overnight index swap contracts for next week’s Federal Open Market Committee meeting, were pricing in 80 basis points of adjustment on Wednesday, suggesting there is a slim chance of a rate hike. rates of 100 basis points instead of a 75 basis point increase.
The current target range set by the Fed is 2.25% to 2.50%. Traders cut estimates of a top rate in March to 4.4%.