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TREASURIES-U.S. benchmark yield curve hits biggest inversion since at least March 2010

·4 min read

* BMO Capital says 2/10 inversion is the most since February 2007 * U.S. 3-mth/10-year curve flattens, narrowest gap since July 2021 * U.S. 10-year auction shows weak results (Adds new comment, updates prices) By Gertrude Chavez-Dreyfuss NEW YORK, July 12 (Reuters) - The benchmark U.S. two-year/10-year yield curve on Tuesday posted the largest inversion since at least 2010, on growing fears about the world's largest economy tipping into recession amid continued aggressive tightening by the Federal Reserve. That curve remained inverted for a fifth consecutive day, with the two-year yield exceeding that of the 10-year by as much as 12.4 basis points. That is the largest inversion since at least March 2010, according to Refinitiv data. It was last at -9.1 bps. Other banks saw a slightly different level of inversion for the 2/10 spread. BMO Capital said the 2/10 pushed as low as -10 bps, the most inverted spread since February 2007. Inversions are widely viewed as precursors to recessions. The 2/10 inversions, for instance, preceded the last eight recessions, including 10 of the last 13, BoFA Securities analysts said in an earlier research report. The spread between the yield on 3-month Treasury bills and 10-year notes has also started to narrow after steepening for most of the year. That curve, which some say is a more reliable indicator of incoming recession, flattened by as much as 69.31 bps on Tuesday, the tightest spread since July 2021. The spread was last at 74.11 bps. "We are seeing some weaker economic numbers in some areas. It reflects the hiking pressure from the Fed," said Ellis Phifer, managing director, fixed income research, at Raymond James, in Memphis, Tennessee. "The 3-month/10-year is rapidly catching up to the 2/10. Once they catch up, or at least get closer, then we're a lot closer to recession." The last time the 3-month/10-year curve inverted was in February 2020. A month later, the Fed cut the benchmark overnight lending rate to near zero as the coronavirus pandemic triggered an economic crisis around the world. In late afternoon trading, U.S. benchmark 10-year yields were down 4 bps, at 2.95%. The U.S. 10-year auction on Tuesday, meanwhile, showed soft results, with a high yield of 2.96%, above the expected rate at the bid deadline. This meant that investors demanded a higher premium to hold the benchmark note. The bid-to-cover ratio, a gauge of demand, was 2.34, the lowest since December 2020, according to Refinitiv data. Indirect bidders, which include foreign central banks, took down 61.3% of the auction, roughly 5.5 percentage points lower than the four-auction average, according to Jefferies in a research note. Zachary Griffiths, Wells Fargo's rates strategist, said in a research note that U.S. 10-year notes have become less attractive to foreigners on an FX-adjusted basis. U.S. 10-year Treasuries currently offer a euro-based investor a yield 100-bps lower than the 10-year German bund when hedging the first three months of FX risk, he added. In other maturities, U.S. 30-year bond yields were down 5.2 bps at 3.128%. On the short end of the curve, U.S. two-year yields slipped 2.5 bps to 3.045%. The market is also bracing for U.S. consumer price index data on Wednesday, with year-on-year CPI in June estimated at a fresh 40-year high of 8.8%, according to a Reuters poll. The monthly core index is expected to have eased to 5.8% from 6.0% in May. "High headline inflation is likely to move 2-year TIPS BEs (breakevens) higher, and we have doubled down on our long position as we look for near-term inflation to remain elevated," TD wrote in Tuesday's research note. The U.S. two-year breakeven inflation rate on Tuesday, however, fell to 2.8966%, the lowest since October 2021. July 12 Tuesday 3:55PM New York / 1955 GMT Price Current Net Yield % Change (bps) Three-month bills 2.165 2.2073 0.036 Six-month bills 2.6875 2.7624 -0.011 Two-year note 99-234/256 3.045 -0.025 Three-year note 99-200/256 3.0769 -0.026 Five-year note 101-18/256 3.0161 -0.034 Seven-year note 101-102/256 3.0257 -0.038 10-year note 99-76/256 2.9576 -0.033 20-year bond 98-16/256 3.3847 -0.046 30-year bond 94-248/256 3.1357 -0.044 DOLLAR SWAP SPREADS Last (bps) Net Change (bps) U.S. 2-year dollar swap 23.25 -2.00 spread U.S. 3-year dollar swap 4.75 -2.00 spread U.S. 5-year dollar swap 0.50 -1.25 spread U.S. 10-year dollar swap 7.50 -0.50 spread U.S. 30-year dollar swap -25.25 0.00 spread (Reporting by Gertrude Chavez-Dreyfuss; Editing by Nick Zieminski, Alexandra Hudson and Richard Chang)