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Treasury yields fell on Tuesday as investors continued to seek the safety of government debt because of lingering economic growth concerns ahead of Wednesday’s U.S. consumer price index data.
The widely followed 2-year/10-year spread shrank to minus 8.5 basis points, its deepest inversion since Feb. 27, 2007, based on 3 p.m. levels from Dow Jones Market Data — putting recession risks in focus.
What’s happening
-
The yield on the 2-year Treasury
TMUBMUSD02Y,
3.036%
declined 2.5 basis points to 3.043% from 3.068% late Monday. -
The yield on the 10-year Treasury
TMUBMUSD10Y,
2.961%
retreated 3.2 basis points to 2.958% from 2.990% on Monday. -
The yield on the 30-year Treasury
TMUBMUSD30Y,
3.148%
fell 4.3 basis points to 3.136% from 3.179% Monday afternoon. - All three yields are down for two consecutive trading sessions.
What’s driving markets
Worries about a slowing global economy have encouraged investors to flock to the perceived safety of U.S. Treasurys, pushing yields lower.
The 2-year/10-year yield spread shrank to as little as minus 13 basis points before settling at minus 8.5 basis points. The moves were driven by a decline in the 10-year rate that outpaced the drop in the 2-year yield, and signaled an economic downturn may be on the horizon.
Read: Deepening inversion of Treasury yield curve is `getting harder to dismiss’
The mood was cautious ahead of U.S. June inflation data due on Wednesday, a report which will impact the likely pace of the Federal Reserve’s next interest-rate hike in two weeks.
See: U.S. inflation is still rising. Can it reach 9%?
Fed funds futures traders are pricing in a 93% probability that the Fed will raise its benchmark interest rate by another 75 basis points to a range of 2.25% to 2.5% at its July 26-27 meeting. They also see a 7% chance of a 100 basis point hike.
The MOVE index, a measure of implied Treasury market volatility, was trading at 148, up 76% year to date.
Meanwhile, a $33 billion 10-year note reopening produced statistics that were “on the weaker side” overall, said Jefferies economists Thomas Simons and Aneta Markowska.
What analysts are saying
“The combination of monetary policy makers’ hawkish conviction, building economic slowdown concerns, and an emerging interest in buying duration has led to further curve compression/inversion,” said BMO Capital Markets strategists Ian Lyngen and Ben Jeffery.
“The next area of relevance is the -10 bp to -20 bp zone that was maintained throughout the bulk of the Nov ‘06 to Mar ‘07 period. The 2006/2007 episode of inversion occurred as the FOMC reached the terminal policy rate of that cycle – which was 5.25%,” they wrote in a note.
