The one-dollar bills can be seen in front of the stock chart shown in this illustration, made on February 8, 2021. REUTERS / Dado Ruvic / Illustration / File Photo
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June 13 (Reuters) – Two-year US bond yields rise above Monday’s 10-year borrowing costs – a so-called inversion of the curve that often portends an economic recession – interest rates are expected to rise faster and faster. far from expected.
Fears that the US Federal Reserve may choose an even larger-than-expected rate hike to curb inflation have led to two-year highs in 2007.
But it is also widely believed that aggressive interest rates could drive the economy into recession.
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The difference between two- and 10-year government bond yields fell to minus 2 basis points (bps) before rising back to about five basis points, Tradeweb prices showed.
The curve reversed two months ago for the first time since 2019, before normalizing.
Reversing this part of the yield curve is seen by many analysts as a reliable signal that a recession may occur in the next year or two.
This move was followed by inversions on Friday in the three-year / 10-year and five-year / 30-year part of the state budget curve, after data show that US inflation continues to accelerate in May.
Yield curve
Two-year bond yields rose to a 15-year high of about 3.25% before falling to 3.19%, while 10-year yields reached the same level, the highest since 2018.
Friday’s data shows the biggest annual rise in inflation in the United States in nearly 40-1 / 2 years, fierce hopes that the Federal Reserve may suspend its campaign to raise interest rates in September. Many believe that the central bank may actually need to step up the pace.
Barclays analysts said they now expect a move of 75 basis points from the Fed on Wednesday, rather than the 50 basis points that were baked.
Money markets are now pricing a cumulative 175 basis points on increases until September and also see a 20% chance of moving from 75 basis points this week, which, if implemented, will be the biggest increase in a single meeting since 1994.
UBS strategist Rohan Hannah said the European Central Bank’s hawk communication, along with the inflation footprint, “completely shattered the idea that the Fed might not provide 75 bps or that other central banks would move gradually.”
“The whole idea is gone … then you get a smoothing of the yield curves with a turbocharger. “It’s just realizing that peak inflation in the United States is not behind us, and unless we are told, maybe the Fed’s peak hawk is not behind us either,” Hannah added.
Meanwhile, bets on the final interest rate in the United States – where interest rates on Fed funds could peak this cycle – are shifting. On Monday, they set prices at 4% in mid-2023, almost one percentage point more than at the end of May.
Deutsche Bank said interest rates are now peaking at 4.125% in mid-2023.
Some Fedwatchers are skeptical that the Fed will move faster with rising interest rates. Thomas Kosterg, a senior economist at Pictet Wealth Management, noted, for example, that most of the drivers of inflation, such as food and fuel, remain out of the control of central bankers.
“In the summer, they will be aware of data on growth and housing, which is starting to look more volatile,” Kosterg said. “I doubt they’ll make 75 bps … 50 bps is already a big step for them.”
The Treasuries sell-off put other markets on the edge, sending Germany’s 10-year earnings to the highest since 2014 and lowering S&P 500 futures 2.5% lower.
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Report by Yoruk Bahceli and Sujata Rao Edited by Dhara Ranasinghe and Mark Potter
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