Deepest Bond Yield Inversion Since Volcker Suggests Hard Landing
March 7, 2023 |Michael Mackenzie and Liz McCormick | Bloomberg
The bond market is doubling down on the prospect of a US recession after Federal Reserve Chair Jerome Powell warned of a return to bigger interest-rate hikes to cool inflation and the economy.
As swaps traders priced in around a full percentage point of Fed hikes over the next four meetings, the yield on two-year Treasury notes touched 5.08% on Wednesday, its highest level since 2007. Critically, longer-dated yields remained in check, with the 10-year rate under 4% and the yield on 30-year bonds lower.
As a result, the closely-watched spread between 2- and 10-year yields this week showed a discount larger than a percentage point for the first time since 1981, when then-Fed Chair Paul Volcker was engineering hikes that broke the back of double-digit inflation at the cost of a lengthy recession. A similar dynamic is unfolding now, according to Ken Griffin, the chief executive officer and founder of hedge fund giant Citadel.
