Two-year yields highest since 2007 before Fed decision

06/14/2022

2 minutes read

2022.06.14 19:51

Two-year yields highest since 2007 before Fed decision
FILE PHOTO: U.S. dollar banknotes are displayed in this illustration taken, February 14, 2022. REUTERS/Dado Ruvic/File Photo

By Karen Brettell

NEW YORK (Reuters) – Interest rate sensitive two-year U.S. Treasury yields climbed to their highest level since 2007 on Tuesday as investors raised bets that the Federal Reserve will hike rates by 75 basis points when it concludes its two-day meeting on Wednesday.

Surging consumer prices in May, which rose at their fastest pace in nearly 40-1/2 years, has rattled markets and increased speculation that the U.S. central bank will hike rates at a faster pace than previously expected to stem rising price pressures.

Fed funds futures traders are now pricing in an 87% chance of a 75 basis point increase on Wednesday, and a 13% chance of a 50-basis-point increase.

Expectations of aggressive Fed tightening, and an inversion in a key part of the Treasury yield curve, have increased fears that the U.S. economy could be headed into a downturn. However, Padhraic Garvey, regional head of research, Americas at ING, says it is too soon to expect a recession.

So-called real yields, which adjust for expected inflation, have driven recent yield increases, which is consistent with strong growth, Garvey said, adding that “before we get to the recession we have a whole different dynamic, which is really elevated inflation and an economy that is still strong.”

Yields on 10-year Treasury Inflation-Protected Securities (TIPS), known as real yields, hit 0.743% on Tuesday, the highest since March 2019. Five-year TIPS yields reached 0.503%, the highest since March 2020.

Two-year Treasury note yields reached 3.430%, the highest since November 2007. Benchmark 10-year notes were at 3.339%, after reaching 3.440% on Monday, the highest since April 2011.

The closely watched yield curve between two-year and 10-year notes was last two basis points, after earlier inverting by five basis points. An inversion in this part of the curve is viewed as a reliable indicator that a recession is likely in one to two years.

Another part of the yield curve that is viewed as a recession indicator, the gap between two-year and five-year yields, remains positive at 13 basis points.

Goldman Sachs (NYSE:GS) on Monday said it expects the Fed to raise rates by 75 basis points in June and July, up from previous expectations of 50 basis point raises at each meeting.

Data on Tuesday showed that U.S. producer prices increased solidly in May amid a surge in the cost of energy products, suggesting inflation could remain elevated for a while.

June 14 Tuesday 9:53 a.m. New York / 1353 GMT

Price Current Net

Yield % Change

(bps)

Three-month bills 1.755 1.7874 0.125

Six-month bills 2.31 2.3698 0.158

Two-year note 98-118/256 3.3175 0.037

Three-year note 98-96/256 3.4498 -0.014

Five-year note 96-68/256 3.4506 -0.029

Seven-year note 95-212/256 3.4288 -0.032

10-year note 96-28/256 3.3389 -0.032

20-year bond 94-228/256 3.6119 -0.026