- The April low of -9.2 basis points broke yesterday
The deeper inversion in the US Treasury curve is adding to recessionary fears today.
US 10-year yields have fallen 6.7 bps to 2.928% while 2s are down 2.9 bps to 3.039%. That’s left a spread of -11 basis points, which breaks the April low.
An inversion of 2s/10s is a classic recessionary signal, though a well-cited Fed paper argues that 3 month bills to the 10-year are a better metric.
The question now is how deeply will the curve invert? In the November 2006 to March 2007 period — which preceded the financial crisis — the inversion ranged from 10-20 basis points. With the Fed still hiking — putting upward pressure on 2-years — we could be on the path to a much deeper inversion, including Fed funds above the 10 year.
“With a 75 bp Fed hike anticipated in two weeks, this spread will very quickly narrow and by year end we anticipate 10-year yields will be trading well through Fed funds. It’s with this backdrop that the notion of 2s/10s inverting in a fashion comparable to 1989 and 2000 begins to resonate and an ultimate target of -40 bp to -55 bp doesn’t seem as unreasonable as it might have just a few weeks ago,” writes BMO in a note today.
What makes recession winds in the market particularly interesting is that negative growth is not in the base case of the Federal Reserve and even the hawks believe that a recession would quickly cool inflation. If (when?) we see mounting signs of recession, the bond market is saying the Fed will pivot.
