Treasury 5- to 30-Year Yield Curve Inverts by Most Since 2000

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(Bloomberg) -- The Treasury yield curve from five to 30 years inverted by as much as 20 basis points in US trading Thursday, a day after the two- to 30-year spread also became the most negative in more than two decades.

Shortly before the release of mixed US economic data stalled the trend, the five-year note’s yield rose almost eight basis points to around 3.68%, the highest since 2008 and 20 basis points higher than 30-year bond yields at that time. 

The curve had inverted by 18.5 basis points on June 14, previously the most since 2000, in a selloff unleashed by worse-than-expected inflation data that repriced expectations for how much the Federal Reserve was likely to raise its policy rate. 

“Yield-curve flattening has been driven by hawkish central-bank rhetoric supported by stronger-than-expected CPI and resiliency in other growth data,” said Alex Li, head of US rates strategy at Credit Agricole (OTC:CRARY), referring to the consumer price index. August levels released Sept. 13 reinvigorated the trend as they caused traders to price in more aggressive Fed action.

Treasury yields for two- to five-year notes have risen to multiyear highs this week. Longer-maturity yields have risen less as the prospect of Fed policy rates exceeding 4% fuels “market concerns about growth slowing down toward the end of this year or in early 2023,” Li said.

Concurrently with the curve reaching maximum inversion, the expected peak in the Fed’s policy rate implied by swap contracts momentarily increased to 4.5%, the March 2023 contract’s value. It then stabilized at around 4.45%. 

The expected peak has risen by a full percentage point since the Fed’s last policy meeting in July, when the range was set at 2.25%-2.5%. The upper bound of the Fed’s target range for the policy rate was last raised to 4.5% in 2006.

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The August CPI data led the market to fully price in another three-quarter-point rate increase on Sept. 21, the Fed’s next decision date, and to give some odds to a full-point increase. The US central bank has raised rates four times since March in response to accelerating inflation. The rate hikes follow a two-year period when the lower bound was 0%.

The sequential forecasts are for the policy rate to decline by about half a point from its peak level next year, suggesting that economic conditions are likely to call for Fed rate cuts during that time frame.

However in interest-rate options trading Thursday, there was demand for structures that anticipate the policy rate will be as high as 4.5% at the end of next year. 

Thursday’s inversion to 20 basis points was sustained only briefly amid mixed economic data including a steeper-than-expected drop in the Philadelphia Fed’s business outlook index for September.

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