Bond investors’ concern over a potential US recession deepened after Federal Reserve Chair Jerome Powell signaled policymakers may keep pushing interest rates higher.
Yields on two-year Treasuries exceeded those on 10-year notes by as much as one percentage point on Wednesday after short-term rates climbed following Powell’s testimony in Congress. The two-10 segment of the yield curve — which has inverted before each of the past five US recessions — is now the most inverted since March.
The impact of Powell’s testimony may have been exacerbated by faster-than-expected UK inflation data that added to speculation the Bank of England will increase the pace of its tightening when it meets Thursday. A number of developed central banks turned more hawkish this month on concern inflation is staying too high for too long.
“The UK is sending the signal that it’s too early to make the call that central-bank rate hikes have been enough to keep the inflation genie in the bottle,” said Prashant Newnaha, a rates strategist at TD Securities in Singapore. “In the battle of growth versus inflation, inflation wins hands down, meaning that central banks are likely to risk a severe downturn to win the inflation battle.”
Hawkish Fed
While the Fed kept interest rates on hold last week for the first time in more than a year, it surprised investors and economists by projecting it’s likely to raise borrowing costs twice more by year-end. Powell reiterated that message in congressional testimony Wednesday, stressing that most US policymakers expect more hikes will be needed with inflation remaining well above the Fed’s 2% target.
The inversion of the two-10 spread had widened to 111 basis points on March 8, the most since the 1980s, before narrowing later that month as the collapse of several US regional lenders fueled concern a potential banking crisis would convince the Fed to start cutting rates.
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