The 2-year Treasury note yield was little changed Tuesday, while the benchmark 10-year maturity fell sharply, resulting in the 2-year Treasury yield intermittently trading above the 10-year, sending the spread between briefly below zero, as investors factored in the likelihood of aggressive interest rate increases by the Federal Reserve and a more pessimistic economic outlook.
The last time the spread inverted was on Aug. 30, 2019, based on 3 p.m. levels from Dow Jones Market Data.Yield moves
- The yield on the 10-year Treasury note TMUBMUSD10Y, 2.400% declined 7.7 basis points to 2.399%, compared with 2.476% at 3 p.m. Eastern on Monday. It’s the largest one-day decline since March 4, according to 3 p.m. levels from Dow Jones Market Data.
- The 2-year Treasury note yield TMUBMUSD02Y, 2.374% stood at 2.349% versus 2.34% Monday afternoon. That’s the highest level since April 23, 2019, according to Dow Jones Market Data. It traded as high as 2.479% during the day.
- The yield on the 30-year Treasury bond TMUBMUSD30Y, 2.505% declined 5 basis points to 2.522% from 2.572% late Monday.
Market drivers
The 2-year yield traded intermittently above the 10-year rate on Tuesday, inverting that part of the curve in what’s regarded as a reliable precursor of past recessions, albeit with a lag.
Meanwhile, all three major U.S. stock market indexes moved higher, with optimism over cease-fire talks between Russia and Ukraine credited with lifting sentiment in equities. In negotiations, Russia said it would cut back on operations near Kyiv to “increase trust.”
Signs of progress in the Russia-Ukraine conflict may have helped contribute to Tuesday’s 2s/10s inversion as with geopolitical risks diminishing, the Fed would theoretically be freed up to deliver a more aggressive round of interest rate increases to combat inflation. On March 21, Fed Chairman Jerome Powell left the door open to rate increases of more than 25 basis points, or a quarter percentage point — a prospect echoed by some other policy makers.
On Tuesday, for instance, Philadelphia Fed President Patrick Harker said he is “very open” to a half percentage point hike as the central bank moves to tamp down the worst outbreak in inflation in 40 years.
In U.S. economic data, the S&P CoreLogic Case-Shiller 20-city price index posted a 19.1% year-over-year gain in January, up slightly from 18.6% the previous month. U.S. job openings dipped lower to 11.27 million in February, but remained near a record high. And the Conference Board’s consumer confidence index for March came in at 107.2, rising for the first time this year.
Treasury’s $47 billion auction of 7-year Treasury notes produced “good bidding stats,” according to Ben Jeffery of BMO Capital Markets.
It’s a busy week for jobs data, including Automatic Data Processing’s Wednesday estimate of March private-sector job creation and the Labor Department’s official March jobs report due on Friday.
What analysts say
“Historical experience suggests that an inversion of the 2y10y curve does not signal an imminent recession; the lag from inversion has been about 20 months, and in several instances, it has been longer than two years,” Anshul Pradhan and Samuel Earl of Barclays BARC, -2.52% wrote in a note Tuesday.
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