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

·4 min read

* U.S. 2/10 inversion is largest since November 2000 * 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 (Updates prices, first bullet headline) 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 that the Fed would hike by 100 basis points (bps), more than the 75 bps priced in on Tuesday, at its July 26-27 meeting, came after a report showing the annual U.S. inflation rate reached a more than 40-year peak in June. The inversion on the U.S. two-year/10-year yield curve accelerated on Wednesday to as much as 24.40 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 in choppy trading. "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," he added. The Labor Department data 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. U.S. two-year yields, which reflect interest rate expectations, surged to a four-week high of 3.215% and was last up nearly 9 bps at 3.129%. U.S. fed funds futures on Wednesday priced in 54% 0% chance of a 100-bps 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%, compared with 7.6% on Tuesday. 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 afternoon 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 3:48PM New York / 1948 GMT Price Current Net Yield % Change (bps) Three-month bills 2.35 2.3969 0.192 Six-month bills 2.86 2.9423 0.174 Two-year note 99-193/256 3.1299 0.087 Three-year note 99-160/256 3.1319 0.052 Five-year note 101-22/256 3.0126 -0.003 Seven-year note 101-152/256 2.9945 -0.033 10-year note 99-184/256 2.9078 -0.050 20-year bond 98-160/256 3.3452 -0.037 30-year bond 96-44/256 3.0717 -0.065 DOLLAR SWAP SPREADS Last (bps) Net Change (bps) U.S. 2-year dollar swap 23.50 -0.25 spread U.S. 3-year dollar swap 3.50 -1.25 spread U.S. 5-year dollar swap -0.75 -1.25 spread U.S. 10-year dollar swap 7.50 0.00 spread U.S. 30-year dollar swap -25.00 0.25 spread (Reporting by Gertrude Chavez-Dreyfuss; Additional reporting by Herb lash; Editing by Chizu Nomiyama and Jonathan Oatis)