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Bond Report: Treasury yields climb by most in two to three weeks, curve reinverts after Fed’s June minutes

Treasurys sold off heading into Wednesday afternoon, sending yields higher across the board as traders awaited the minutes of the Federal Reserve’s June 14-15 meeting.

The spread between 2- and 10-year yields rose back above zero, to 2 basis points, leaving that part of the curve uninverted again.

What’s happening

The yield on the 2-year Treasury
TMUBMUSD02Y,
2.889%

rose to 2.865% versus 2.814% Tuesday afternoon.

The yield on the 10-year Treasury
TMUBMUSD10Y,
2.898%

edged up to 2.89% from 2.808% in the prior session.

The yield on the 30-year Treasury
TMUBMUSD30Y,
3.132%

rose to 3.124% versus 3.032% on Tuesday.

What’s driving markets

On Tuesday and the early part of Wednesday, the bond market had been signaling that a U.S. economic downturn may be likely through a 2-year yield that traded above the 10-year, shrinking the spread between the two to below zero and inverting the yield curve.

That inversion came undone, however, as trading wore on Wednesday and investors sold off Treasurys, causing yields to shoot higher.

A yield-curve inversion is traditionally seen as a potential harbinger of recession, though usually with a lag, and investors will be parsing the minutes of the Federal Reserve’s June meeting released at 2 p.m. Eastern Time for further clues on policy makers’ appetite to pursue even bigger hikes in their main policy rate target.

Broadly speaking, the sharp change in focus in recent weeks from inflation-fretting to recession-angst has sent investors into the longer end of the Treasury yield curve. As a result, the 10-year bond yield has plunged almost 60 basis points since the middle of June.

The ICE BofA MOVE index, a gauge of Treasury volatility, climbed this week to its highest since the outset of the COVID-19 pandemic, according to Bloomberg.

In data released Wednesday, an ISM barometer of business conditions at service-oriented companies such as restaurants, hotels and retailers fell slightly to 55.3% in June and hit the lowest level in two years — another sign of a slowing U.S. economy.

What analysts are saying

“A deeper inversion of the 2s/10s yield curve was the primary takeaway from the overnight session. Having drifted as low as -3.6 bp, this benchmark spread has only been lower during three trading sessions this cycle and there is no question that the current episode has a decidedly different character than the inversions in April and June,” said BMO Capital Markets strategists Ian Lyngen and Ben Jeffery.

“Specifically, the prior two forays below zero in 2s/10s were dismissed as either too soon in the cycle to be a relevant signal of investor apprehension regarding the performance of the real economy or simply a relic of the Fed’s pandemic-inspired QE purchases,” they wrote in a note. “Today however, the conversation is centered on the possibility of a near-term recession and the atypical ways in which the Fed will respond given that inflation continues to run unacceptably high from the perspective of monetary policy makers and consumers alike.”

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