US government bond investors pushed two-year yields above 10-year yields by the widest margin since the early 1980s Thursday, a sign of flagging confidence in the economy’s ability to withstand additional Federal Reserve interest-rate hikes.
The yield on the shorter-dated Treasury reached 4.46% during the session and at one point exceeded the longer-dated note’s by as much as 86 basis points. The two-year rate was 4.10% on Feb. 2, before stronger-than-expected January employment data sparked a reassessment of how much higher the Fed’s policy rate might need to go to stifle inflation.
Overnight index swaps have pushed pricing for a peak in the federal funds rate to about 5.1% in July, suggesting a target range of 5% to 5.25%. But it’s trades in options this week that have weighed heavily on the policy-sensitive two-year note, anticipating the risk of a shift higher toward 6%.
Ten-year yields lower than two-year yields — the status quo since July — signify expectations that elevated policy rates will take an economic toll. A portion of the latest curve shift is attributable to the debut via an auction on Wednesday of a new 10-year Treasury note that trades at a yield slightly lower than the previous one, and thus at a wider negative spread to the current two-year.
