Bond traders are losing certainty.
As Treasuries hit record lows and turmoil this year, traders had one bet they might count on. Short-term bond yields will surge above long-term bond yields on speculation that a series of rate hikes by the Fed will push the economy into a recession.
Traders’ bets steadily paid off as short-term bond yields surged, while recession fears held back the rally in 30-year yields. By the end of September, the yield on the 30-year bond fell below the yield on the 2-year bond by 68 basis points (bp, 1bp = 0.01%), marking the largest reversal of yields since the Internet stock bubble burst in 2000.
But those yield spreads have since narrowed on speculation that the Fed will end monetary tightening early next year. Some investors say the inverted yield curve trade has almost come full circle.
“Looking back at periods of significant yield curve inversion, such as the early 1980s, has shown that it was fleeting,” said Richard Familletti, chief investment officer for U.S. total return and fixed income at SLC Management. , we are nearing the end of the peak formation of interest rates.”
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The yield curve inverted in the middle of this year as the Fed tightened the Fed aggressively for the first time in decades in response to persistently high inflation. Yields on 10-year bonds fell below 2-year yields in early July, followed by 30-year yields. These inversions of long-term and short-term interest rates are currently around 40bp, which is smaller than the level seen in late September.
news-rsf-original-reference paywall">Original title:Bond Market Sees Once Easy Yield-Curve Bets Upended by Fed Path(excerpt)