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U.S. bond yields rose on Thursday, led by 2- to 5-year maturities, further inverting the Treasury curve on concerns that Federal Reserve hawkishness could tip the U.S economy into recession.
What’s happening
-
The yield on the 2-year Treasury
TMUBMUSD02Y,
3.008%
rose to 2.992% from 2.961% on Wednesday afternoon. As of Wednesday, the 2-year yield was up 223 basis points for the year to date. -
The yield on the 10-year Treasury
TMUBMUSD10Y,
2.955%
advanced to 2.935% versus 2.911% as of Wednesday. -
The yield on the 30-year Treasury
TMUBMUSD30Y,
3.145%
climbed to 3.123% from 3.117% in the prior session.
What’s driving markets
Investors were digesting the minutes from the Federal Reserve’s June meeting, published on Wednesday, and had little reason to change their view that Chairman Jay Powell and colleagues may risk a meaningful economic slowdown in order to damp inflation.
With U.S. inflation running at a headline annual pace of 8.6% for May, the Fed raised its main policy rate target last month by 75 basis points to between 1.50% to 1.75%. The June 14-15 minutes revealed that policy makers saw a significant risk that elevated inflation could become “entrenched,” and determined that a 50- to 75-basis-point rate hike at their next meeting would likely be appropriate. They also saw the possibility of an “even more restrictive stance” on monetary policy if price pressures persist.
The yield spread between the U.S. 10-year and 2-year bonds shrank to as low as minus 7.9 basis points on Thursday. This inversion of the yield curve is taken as an early signal that growth prospects are souring as short-term interest rates rise.
That said, a markedly weaker labor market would give the Fed pause for thought, and with this in mind investors will be eager to see the U.S nonfarm payrolls data, due on Friday. Economists are forecasting 250,000 jobs were added in June.
See: Hiring in U.S. likely fell to 18-month low in June —250,000 new jobs forecast
Data released on Thursday showed that 235,000 people applied for jobless benefits last week, marking the highest number in six months. And the U.S. international trade deficit narrowed 1.3% in May to $85.5 billion, the Commerce Department said Thursday.
In the U.K., British Prime Minister Boris Johnson resigned Thursday, acknowledging that it was “clearly the will” of his party that he should go. The wheels have been set in motion for a new U.K. leader, who faces an economy at risk of recession.
What analysts are saying
“Real interest rates in the belly of the curve have returned within 10bp of their highs just before June’s FOMC meeting, while long and short Treasurys easily surpassed those levels in yesterday’s sell-off,” said Jim Vogel, executive vice president of FHN Financial. “As investors see real rates becoming more restrictive, the recession theme will gain more adherents even if current data align with a soft landing. That may (finally) bias the curve toward sustained flattening.”
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