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Bond Report: Benchmark 10-year Treasury rate hits highest in 11 years, curve nears inversion, underlining recession fears

Treasury yields jumped on Monday, with the rate on the 2-year Treasury note nearing the 10-year — threatening to invert the yield curve again and underlining fears that persistently hot inflation will require the Federal Reserve to tighten rates so aggressively it will push the economy into recession.

What yields are doing

The yield on the 10-year Treasury note
TMUBMUSD10Y,
3.373%

jumped 21.5 basis points to 3.371%, compared with 3.156% at 3 p.m. Eastern on Friday. Monday’s level was the highest since April 21, 2011, according to Dow Jones Market Data. Yields and debt prices move opposite each other.

The 2-year Treasury note yield
TMUBMUSD02Y,
3.375%

rose to 3.279% versus 3.047% on Friday afternoon, marking its highest 3 p.m. level since Dec. 26, 2007.

The spread between the 10- and 2-year notes narrowed to as little as 0.24 basis point early Monday, according to FactSet. The spread briefly inverted in late March and early April. Meanwhile, the 5- and 30-year spread inverted by as much as minus 16 basis points.

The 30-year Treasury bond yield
TMUBMUSD30Y,
3.360%

rose to 3.368% from 3.195% late Friday. The long-bond on Monday touched its highest level since Nov. 9, 2018.

What’s driving the market

The yield curve typically slopes higher, as investors factor in brighter economic prospects and demand higher yields to hold longer-dated Treasurys. Inversions of the curve can reflect fears over the outlook for economic growth. An extended inversion of the 2-year/10-year measure of the curve is considered a reliable recession warning signal, albeit with a lag.

Federal Reserve policy makers meet Tuesday and Wednesday and are expected to raise the fed-funds rate by at least 50 basis points, or half a percentage point. Some economists and traders are penciling in the prospect of a 75 basis point move after data released on Friday showed the consumer-price index jumping 1% on a monthly basis in May and pushing the annual rate of inflation to 8.6%, a 40-year high after a modest slowing in April.

See: ‘Doves don’t exist on the FOMC right now’: Economists expect hawkish Fed meeting this week

The selloff in Treasurys comes alongside a steep drop in equities. U.S. stock indexes fell hard last week, including a post-CPI drop on Friday. All three major U.S. stock indexes closed sharply lower Monday, with Dow industrials dropping nearly 900 points and the S&P 500 slipping into a bear market, in line with a global equity selloff.

What analysts say

“The U.S. CPI data wasn’t that much worse than expected but the market was over-invested in the idea that inflation has peaked,” said Kit Juckes, global macro strategist at Société Générale, in a note.

“We’re still seeing waves of price pressure crashing through the economy one after another, and while each wave may be ‘transitory,’ they keep on coming and will do so until U.S. demand has softened significantly,” he wrote. “The policy challenge is that the Fed has no idea how much monetary tightening is needed and will only find out it has done too much, long after the event. And we know what happens then.”

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