The Treasury yield curve is less inverted than it was earlier in March, though the reasons for the move in the closely watched market gauge are nuanced.
Concerns about an abrupt pullback in bank lending are among the reasons for Friday’s drop in the 2-year yield TMUBMUSD02Y , which briefly fell as much as 36 basis points and headed at one point for its biggest three-week decline since November 1987. The 2-year rate’s decline outpaced that of the 10-year yield TMUBMUSD10Y , resulting in a less-negative spread between the two of around minus 40 basis points relative to March 8’s level of minus 109 basis points.
Indeed, just because the 2s/10s spread is out of triple-digit negative territory doesn’t mean the outlook has gotten better for the U.S. economy. The spread, one of the bond market’s most reliable gauges of impending recessions, is still below zero — meaning a slowdown in growth is still seen on the horizon.
For investors, all of the recent financial-market moves may feel a bit like whiplash. It was only on March 7, or roughly two weeks ago, that hawkish congressional testimony by Fed Chairman Jerome Powell pushed the policy-sensitive 2-year rate above 5% for the first time since June 2007. At the time, the focus was on stronger-than-expected economic data that had rolled in.
For now, fed funds futures traders are factoring in an 84.5% chance that policy makers will pause in May, leaving the main interest-rate target between 4.75% and 5%, according to the CME FedWatch Tool. Meanwhile, the odds of a first rate cut by June are at 29% and traders see a 36% chance that the fed-funds rate will drop a full percentage point, to 3.75%-4%, by December.
I hope J-Pow keeps his foot on the gas pedal! Keep those hikes coming! Let’s get through this while we’re already heading in that recession direction. Don’t prolong this anymore. We’re already in pain. If you stop now it’ll be like death by paper cut.