As of the close today, Tuesday, March 22, Treasuries had sold off steeply raising the yield on the 10-year Treasury to 2.38%, a huge (for the Treasury bond market) 9 basis points.
The rout took the yield on the 2-year Treasury to 2.16%. On Friday,March 18, the 2-year Treasury yielded 1.94%.
The bond market is taking yesterday’s comment/promise/threat from Fed chair Jerome Powell seriously. Power put the prospect of 50 basis point rate increases, instead of the business-as-usual 25 basis point move per meeting scenario–on the table yesterday. The Fed, he said will take the “necessary steps” to ensure a return to price stability. That will be no mean task with inflation running awn an 8% annual rate right now.
Today’s bond sell off continued to close the gap between long-dated and short-maturity Treasuries with the gap between 5-year and 30-year Treasuries closing to the smallest since 2007.
We aren’t reached an inverted yield curve but the trend certainly points in that direction.
An inverted-yield curve is one of the clearest traditional signs of a coming Recession. If bond traders and investors believe that a Recession is on the horizon, they will push up short-term yields faster than long-term yields in anticipation of an economic slowdown that will produce lower interest rates in the future.
The Fed next meets on May 4. That meeting does not include an update of the central bank’s projections on economic growth, inflation, and interest rates. The next meeting with those Dot Plot projection is scheduled for June 15. I’d speculate that the Fed might hold off on a 50 basis point increase at the May meeting and save that move for June. But I don’t have a whole lot of confidence in that speculation: Too much depends on external events (war in the Ukraine, commodity inflation) and on how much heat the Fed feels from demands that it demonstrate it is serious about fighting inflation.
Treasuries are on course for the worst quarterly losses the market has seen since at least 1973. The Bloomberg U.S. Treasury Index had lost 5.55% since December 31 as of the close on Monday, March 21. That surpasses the 5.45% slump at the start of 1980 that stands as the biggest quarterly decline since the inception of the Bloomberg index.
