Reeling US bond market highlights recession worries

NEW YORK • The US bond market was hammered anew on Monday, with a sell-off driving yields on short-dated Treasuries to one of their biggest daily jumps of the past decade after Federal Reserve chairman Jerome Powell said he was willing to enact larger hikes if needed to fight inflation.

The sharp moves in the US Treasury market are pointing to the risk of an approaching recession, with markets doubting the Fed's plan to engineer a "soft landing" for the economy as it hikes rates to fight inflation, experts said.

Mr Powell's speech on Monday caught some market participants off-guard as they seemed more hawkish than his remarks after the Fed last Wednesday raised the federal funds rate by 25 basis points.

Yields spiked on Monday with the 10-year benchmark note up to a yield of 2.298 per cent from 2.153 per cent on Friday - the highest since May 2019. Yields of two-year Treasuries, which more closely reflect monetary policy expectations, jumped to 2.111 per cent from 1.942 per cent on Friday.

The closely followed part of the yield curve measured between 10-year and two-year Treasuries has narrowed by about 60 basis points since the start of the year, with the longer-dated notes now yielding less than 20 basis points more than two-year debt.

Any inversion of that part of the curve, when shorter notes yield more than longer ones, is generally seen as presaging a recession by six to 24 months.

Morgan Stanley said in a research note on Sunday that an inversion of the yield curve was possible in the second quarter of this year, but that an inversion does not necessarily anticipate a recession.

"However, it does support our view for sharply decelerating earnings growth," it said.

REUTERS