Rate hike possibility drives sharp sell-off in bonds

Published On: March 22, 2022Categories: Latest News1.3 min read

Two-year, five-year, 10-year and 30-year yields, which rise when prices fall, climbed further on Tuesday to their highest since 2019

Treasuries hit fresh depths on Tuesday as traders wagered on outsized half-point rate hikes in both May and June, while the yield curve was flattened by the risk that such aggressive tightening could tip the U.S. economy into recession.

Federal Reserve Chair Jerome Powell said on Monday that policymakers needed to move ‘expeditiously’ as inflation runs hot, and he put the possibility of 50 basis point (bp) hikes on the table driving a sharp sell-off in the bond market.

Two-year, five-year, 10-year and 30-year yields, which rise when prices fall, climbed further on Tuesday to their highest since 2019. CME’s FedWatch tool showed markets pricing a more than 60% probability of a 50 bp hike in May and another in June.

Ten-year yields are also below three- and five-year yields – inverting part of the curve – on expectations that front-loaded hikes hurt growth. The closely-watched two-year and 10-year spread has narrowed to just 16 basis points.

The recent further drop in the spread between the yields of 10-year and two-year Treasuries is seen by some as a sign that the U.S. economy will not be able to handle the monetary tightening that is now being discounted in the market, said John Higgins, chief market economist at Capital Economics.

After all, on four previous occasions since the late 1980s when this spread fell to, or below, zero, a recession ensued, he said.

The two-year yield rose as much as 7.4 bps in Asia to 2.192%, its highest since May 2019. The rate has climbed for eight months in a row and has leapt 74 bps so far in March.

Benchmark 10-year yields rose 4.5 bps to 2.3420%.

About the Author: Jonathan Adams

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