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TREASURIES-U.S. benchmark yield curve inversion is largest in nearly 22 years as recession fears rise

·5 min read

* U.S. 2/10 inversion is largest since November 2006 * U.S. two-year yield hits four-week high * U.S. annual CPI hits 9.1% in June, a more than 40-year peak * U.S. rate futures price in 100-bps hike in July (Recasts, adds comment, updates prices) By Gertrude Chavez-Dreyfuss NEW YORK, July 13 (Reuters) - The benchmark U.S. Treasury yield curve on Wednesday posted its largest inversion since November 2000, as investors priced in a full percentage point of Federal Reserve tightening this month that could push the world's largest economy into recession. Expectations of a 100-basis point rate hike came after a more than 40-year peak in annual U.S. inflation in June was reported. The inversion on the U.S. two-year/10-year yield curve accelerate on Wednesday to as much as 24.20 basis points, the most inverted in nearly 22 years, Refinitiv data showed. Yield curve inversions are widely seen as precursors to recessions. U.S. Treasury yields also fell from five-year notes to 30-year bonds, underperforming the front-end of the curve. "The difficult situation is that the Fed is forced to react to this strong inflation data to prevent inflation expectations from moving too much higher," said Brian Smedley, chief economist and head of macroeconomic and investment research at Guggenheim Partners in New York. "At the same time, the forward-looking indicators on the economic outlook have deteriorated rapidly. They're hiking aggressively into an economic slowdown." The Labor Department's report showed the U.S. consumer price index (CPI) jumped 9.1% in June, the largest increase in more than four decades. On a monthly basis, the rise in headline CPI was 1.3%. The so-called "core" CPI, which excludes volatile food and energy prices, rose to 5.9% year-on-year. A Reuters poll showed year-on-year CPI in June had been estimated to come in at 8.8%, while the monthly core index was expected to have eased to 5.8% from 6.0% in May. U.S. two-year yields, which reflect interest rate expectations, surged to a four-week high of 3.215% and was last up nearly 10 bps at 3.14%. U.S. fed funds futures on Wednesday priced in a more than 50% chance of a full percentage-point hike at the Fed meeting later this month, from 0.2% before the CPI data, according to Refinitiv's FedWatch. The CME's FedWatch, on the other hand, showed an even higher probability of 82%. By the end of the year, the futures market has factored in a fed funds rate of 3.65% after the data, from 3.41% just before. The current fed funds rate is at 1.58%. "The Fed is going to continue to be aggressive, and right now the Fed is not your friend, at least from an investor standpoint," said Anthony Saglimbene, global market strategist, at Ameriprise Financial in Troy, Michigan. In midafternoon trading, U.S. benchmark 10-year yields was last down 5.2 bps at 2.904%. U.S. 30-year yields fell 6.3 bps to 3.074%, following a relatively strong auction of the long bond. The reopened 30-year bond sale stopped at 3.115%, lower than the expected rate at the bid deadline. The bid-to-cover ratio, a demand metric, was at 2.44, the highest since March. Indirect bidders, which include foreign central banks, took down 73.2%, a record high that was roughly five percentage points higher than the average of the last four months, Jefferies wrote in a research note after the auction. In other parts of the U.S. Treasuries market, U.S. breakeven inflation rates, bond market measures of investors' expectations on the pace of the rise in prices, rose across the board. The largest increases were on the short end of the curve, with one-year breakevens up 10.6 bps to 3.29% , while those on two-year TIPS were up 6.5 bps at 2.965% Breakeven inflation is the difference between the yield on U.S. Treasury Inflation-Protected Securities (TIPS) and nominal Treasuries, and had declined across the curve, from one-year to 30-year maturities over the last few months. July 13 Wednesday 2:59PM New York / 1859 GMT Price Current Net Yield % Change (bps) Three-month bills 2.33 2.3764 0.171 Six-month bills 2.8625 2.9449 0.177 Two-year note 99-188/256 3.1402 0.097 Three-year note 99-156/256 3.1374 0.057 Five-year note 101-16/256 3.0176 0.002 Seven-year note 101-148/256 2.997 -0.030 10-year note 99-188/256 2.906 -0.052 20-year bond 98-168/256 3.343 -0.039 30-year bond 96-48/256 3.0709 -0.066 DOLLAR SWAP SPREADS Last (bps) Net Change (bps) U.S. 2-year dollar swap 22.50 -1.25 spread U.S. 3-year dollar swap 3.50 -1.25 spread U.S. 5-year dollar swap -1.00 -1.50 spread U.S. 10-year dollar swap 7.25 -0.25 spread U.S. 30-year dollar swap -25.25 0.00 spread (Reporting by Gertrude Chavez-Dreyfuss; Additional reporting by Herb lash; Editing by Chizu Nomiyama and Jonathan Oatis)