SINGAPORE: A selloff across US Treasuries deepened on March 22 with a widely watched section of the yield curve flattening to a two-year low as traders wagered on big rate hikes from the Federal Reserve through the rest of the year.
Federal Reserve chair Jerome Powell said on March 21 that policymakers needed to move “expeditiously” as inflation runs hot, and he raised possibility of 50 basis point (bp) hikes, driving a sharp sell-off in the bond market.
Money markets priced in as much as 190bps of cumulative rate hikes until December with traders expecting the Fed to raise interest rates by as much as 50bps at its next meeting in May.
“This is going to be a fast hiking cycle and the markets are getting increasingly sceptical about the Fed’s capability to engineer a soft economic landing,“ Samy Chaar, chief economist at Lombard Odier at Geneva, said.
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 15bps, its lowest levels since March 2020. They have shrunk from more than 85bps at the start of the year.
“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 US 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.”
Two-year, five-year, 10-year and 30-year yields climbed further on March 22 to their highest levels since 2019.
The two-year yield rose as much as 7.4bps in Asia to 2.193%, its highest since May 2019. The rate has climbed for eight months in a row and has leapt 74bps so far in March. Benchmark 10-year yields rose 4.5 bps to 2.3460%.
The moves have unsettled broader markets, hitting rates-sensitive sectors such as technology while driving Japanese yen to a six-year low as higher yields draw investment from Japan.
Goldman Sachs expects the US Federal Reserve will raise interest rates by 50bps at both its May and June meetings, following hawkish remarks by Powell. - Reuters