Great selling rocks treasury markets, yield curve reversed

The US dollar rupee notes appear on the front of the stock chart shown in this chart taken on February 8, 2021. REUTERS / Dado Ruvic / Illustration / File Photo

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June 13 (Reuters) – US two-year Treasury earnings soared above 10-year borrowing costs on Monday – often referred to as the reversal of the recession – and interest rates are expected to rise faster and higher than expected.

The US Federal Reserve fears it may pick up even bigger-than-expected inflation this week to contain inflation, pushing yields to their two-year high since 2007.

But it plays a view that rising rates of aggression could push the economy into recession.

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The gap between two- and 10-year Treasury yields was as low as minus 2 basis points (pps), rising again to five pps, as tradewave prices showed.

The curve turned upside down two months ago for the first time since 2019 before returning to normal.

The reversal of this part of the yield curve is seen by many analysts as a reliable signal that a recession is likely in the next year or two.

Data show that US inflation continued to rise in May, following Friday’s reversals in the three-year / 10-year and five-year / 30-year segments of the Treasury curve.

Yield curve

Two-year treasury yields rose 3.25% to 3.19%, while 10-year yields touched the same level, the highest since 2018.

Friday’s data shows the biggest annual U.S. inflation increase in nearly 40-1 / 2 years, with the Federal Reserve hoping to suspend its interest rate hike campaign in September. Many feel that the central bank should really increase the pace of austerity.

Barclays analysts said they now expect a 75 bps move from the central bank on Wednesday rather than 50 bps.

Money markets are now set to rise to 175 bps in September, and see a 20% chance of a 75 bps move this week, the biggest single-jump high since 1994 if implemented.

UPS strategist Rohan Khanna said the European Central Bank’s communication with the inflation axis “completely shattered this notion that the Fed will not provide 75 pps or that other central banks will move at a gradual pace”.

“The whole idea was drained … that’s when the turbo-charged plate of yield curves came into being.

Meanwhile, betting on the US terminal rate – the Fed financial ratio may peak in this cycle – is changing. On Monday, they set prices that would reach 4% by mid-2023, an increase of almost one percent since the end of May.

Deutsche Bank has forecast that rates will rise to 4.125% by mid-2023.

Some Fedwatchers are skeptical that the central bank will move fast with rate hikes. Thomas Kosterk, senior economist at Pickett Wealth Management, noted that most inflationary drives, such as food and fuel, are out of the control of central bankers.

“In the summer, they will be aware of growth data and housing, which will start to falter a lot,” Kosterk said. “I doubt they will do 75 bps … 50 bps is already a big step for them.”

Sales in treasuries have marginalized other markets, sending the German 10-year high to a high since 2014 and cutting the S&P 500 futures by 2.5%.

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Report by Yoruk Pahseli and editing by Sujatha Rao Tara Ranasinghe and Mark Potter

Our standards: Thomson Reuters Trust Principles.

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