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Tags: u.s. treasury yield curve | federal reserve rate hike | inflation | recession

US Treasury Yield Curve Flattens on Hint of Aggressive Rate Hikes

Powell
Federal Reserve Board Chair Jerome Powell speaks at a National Association for Business Economics luncheon at the Ritz-Carlton in Washington, D.C. on March 21, 2022. The Fed raised interest rates 25 bps last week for the first time since 2018 in an attempt to combat rising inflation. (Getty Images)

Tuesday, 22 March 2022 07:18 AM EDT

A selloff across U.S. Treasuries deepened on Tuesday with a widely watched section of the yield curve holding just above a two-year low hit the previous day as traders wagered on big rate hikes from the Federal Reserve through the rest of the year.

Federal Reserve Chair Jerome Powell said on Monday that policymakers needed to move "expeditiously" as inflation runs hot, and he raised possibility of 50 basis point (bp) hikes, driving a sharp sell-off in the bond market.

Money markets priced in as much as 190 basis points (bps) of cumulative rate hikes until December, with traders expecting the Fed to raise interest rates by as much as 50 bps at its next meeting in May.

"This is going to be a fast hiking cycle, and the markets are getting increasingly skeptical about the Fed's capability to engineer a soft economic landing," said Samy Chaar, chief economist at Lombard Odier at Geneva.

Yield Curve Partially Inverted

Ten-year yields are also below three- and five-year yields -- inverting part of the curve -- on expectations that front-loaded hikes hurt growth.

The closely-watched two-year and 10-year spread narrowed to as low as 13.5 basis points. On Monday, this spread touched 11.4 bps -- its lowest levels since March 2020.

It has shrunk from more than 85 bps at the start of the year.

"The recent further drop in the spread between the yields of 10-year and two-year Treasuries ... is seen by some as a sign that the U.S. economy will not be able to handle the monetary tightening that is now being discounted in the market," said John Higgins, chief market economist at Capital Economics.

"After all, on four previous occasions since the late 1980s when this spread fell to, or below, zero, a recession ensued."

Longer-Term Yields Up

Two-year, five-year, 10-year and 30-year yields climbed further on Tuesday to their highest levels since 2019.

The two-year yield rose as much as 7.4 bps in Asia to 2.193%, its highest since May 2019. The rate has climbed for eight months in a row and has leapt 74 bps so far in March. Benchmark 10-year yields rose 4.5 bps to 2.3460%.

The moves have unsettled broader markets, hitting rates-sensitive sectors such as technology while driving Japanese yen to a six-year low as higher yields draw investment from Japan.

Goldman Sachs expects the U.S. Federal Reserve will raise interest rates by 50 basis points at both its May and June meetings, following hawkish remarks by Fed chair Jerome Powell.

© 2024 Thomson/Reuters. All rights reserved.


StreetTalk
A selloff across U.S. Treasuries deepened on Tuesday with a widely watched section of the yield curve holding just above a two-year low hit the previous day as traders wagered on big rate hikes from the Federal Reserve through the rest of the year.
u.s. treasury yield curve, federal reserve rate hike, inflation, recession
418
2022-18-22
Tuesday, 22 March 2022 07:18 AM
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