Treasury Curve Inversion Deepens as Yields Jump and Then Plunge

(Bloomberg) — The inversion of the Treasury yield curve deepened Wednesday as the market proved volatile once again, with yields surging on the back of increased confidence about the prospect of the Federal Reserve hiking interest rates and then tumbling again before the day was out.

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The gap between 2-year and 10-year Treasury yields shifted to a fresh extreme, with the longer rate dropping to be as much as 38 basis points below the longer benchmark. That level on the widely watched yield curve metric, seen by many as a potential harbinger of recession, hasn’t been seen since 2000.

The benchmark 10-year rate climbed as much as 10 basis points to 2.85% during the US morning, while shorter-dated yields rose even more as traders briefly moved to price in the potential for a 75-basis-point Fed hike next month at around 1-in-2. By late in the US afternoon though, short-end yields were close to where they ended the previous day, while longer end rates were falling, with the 10-year ending around 2.70%. The slide weighed on the greenback, with the Bloomberg dollar index down marginally for the day after being up close to 0.4% at one stage during the session.

“Yields rose to levels that looked attractive and the buyers started with the back end and it felt like cash was being put to work in fixed income,” said George Goncalves, head of US macro strategy at MUFG. “There is no sense of a catalyst, but the fact the market can’t hold higher rates suggests there is some skepticism among investors that the Fed will not really deliver on its tough talk.”

A cavalcade of comments by Fed officials and stronger-than-expected data on the US services sector helped drive the earlier move up in yields, while US stocks also advanced for the day.

The moves are just the latest in a long line of intraday reversals seen in the market recently. With uncertainty over growth, inflation and central bank policy having picked up, there has been an increase in daily moves of this scale over recent months and a concomitant pickup in various volatility measures.

Yet even with the pullback late Wednesday, rates on key benchmarks remain above the levels they were at as recently as Monday, with much of the enormous surge in yields seen Tuesday still being maintained.

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