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Bond Report: Key yield curve measure inverts again as 2-year Treasury rate posts biggest four-week gain in 26 years

The two-year Treasury yield posted its biggest four-week gain in a quarter of a century on Friday, as a robust U.S. jobs report bolstered expectations for an aggressive 50 basis point rate increase from the Federal Reserve in May.

The 2-year rate, which ended higher for the week, also traded above the 10-year yield for the second time this week — inverting the spread by as much as 10 basis points.

What did yields do?

The 2-year Treasury yield BX:TMUBMUSD02Y climbed 14.6 basis points to 2.43% from 2.284% Thursday afternoon. That’s the highest level since March 19, 2019. The rate has risen 94 basis points over the last four weeks, the largest four-week gain since the week that ended March 15, 1996.

The yield on the 10-year Treasury note
TMUBMUSD10Y,
2.374%

rose 5 basis points to 2.374% from 2.324% at 3 p.m. Eastern on Thursday.  It declined 11.7 basis points this week, based on 3 p.m. levels, according to Dow Jones Market Data.

The 30-year Treasury bond yield
TMUBMUSD30Y,
2.424%

fell 2.2 basis points to 2.422% from 2.444% late Thursday. That’s the lowest level since March 18. The yield declined 18.1 basis points this week, the largest one-week decline since the period that ended June 12, 2020.

What drove the market?

Data released Friday showed that the U.S. economy added 431,000 jobs in March, still a healthy level but less than the 490,000 new jobs that had been forecasted for last month, according to a poll of economists by The Wall Street Journal. The unemployment rate fell to 3.6% in March from 3.8%.

It’s been an eventful week for the Treasury market, with the yield on the 2-year note trading above the 10-year yield again on Friday following a similar dynamic on Tuesday — marking another inversion of that part of the yield curve. Persistent inversions of the 2-year/10-year part of the curve are seen as a recession indicator, albeit with a lag of a year or more.

See: What stock-market investors need to know about the bond market’s recession signal

U.S. factory activity stumbled last month, with the Institute for Supply Management’s manufacturing index falling to 57.1% in March from 58.6% the prior month. Chicago Fed PresidentCharles Evans came out on Friday reiterating his support for steady quarter-point rate hikes.

What are analysts saying?

The second quarter “has come in like a bear with 10-year yields backing up to 2.437% during the overnight session as the long bond breached 2.50%,” wrote Ian Lyngen and Ben Jeffery, rates strategists at BMO Capital Markets, in a note. “Even the front-end of the market was weaker with 2s drifting back to 2.412% and leaving the flat-to-inverted 2s/10s curve in place.”

“As the realized rate hikes mount, there is a stronger case for a deeper inversion, but for now we expect the frequency of parallel shifts in the curve to increase; comparable to the overnight price action.”

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