The spread between the yield on the 10-year Treasury note and that of the 2-year note on Wednesday turned negative for the second time in one week, a recession warning that flashed for the first time since 2005 on Aug. 14.
The inverted bond-market spread is seen by many veteran traders as an important recession omen, though the timing on the eventual downturn is less predictable. At around 3:53 p.m. ET, the yield on the benchmark 10-year Treasury note was higher at 1.579%, while the yield on the 2-year Treasury note rose to 1.573% after briefly entering negative territory.
Fears of an economic slowdown appeared to resurface Wednesday afternoon, when the release of the Federal Reserve’s July meeting minutes reiterated officials’ belief that its July rate cut as just a “mid-cycle adjustment.”
Central bank officials who voted to lower interest rates late last month agreed that the move shouldn’t be interpreted as a predecessor to more rate cuts or a “pre-set course” for the overnight lending costs.
The comments raised some fears that the Fed would do enough to rescue the economy from a recession.
President Donald Trump took to Twitter to voice his concerns about the “CRAZY INVERTED YIELD CURVE!” and again blasted the Fed for what he views as too high interest rates.
Economists consider the spread between the 10-year and the 2-year of great importance because inversions of that part of the curve have preceded every recession over the past 50 years. The last five 2-10 inversions have eventually led to recessions. However, last week’s inversion set off a debate about the reliability of the indicator. Even when it does predict a recession, it is, on average, 22 months early, according to Credit Suisse.
“In their discussion of the outlook for monetary policy beyond this meeting, participants generally favored an approach in which policy would be guided by incoming information and its implications for the economic outlook and that avoided any appearance of following a pre-set course,” the minutes stated.
The minutes were “very consistent with Powell’s post-meeting press conference,” Ian Lyngen, head of U.S. rate strategy at BMO Capital Markets, wrote in an emailed statement. “Since the release the flattening has extended -- but not so much as to trigger an implied deeper ‘policy error’ response.”
Still, investors widely expect the Fed to cut interest rates again before the end of the year after voting to reduce the overnight lending rate by 25 basis points in July. Federal funds futures following the release of the minutes implied traders see a 98% chance of a 25-basis-point cut at the central bank’s Sept. 17–18 policy meeting.
But Chairman Jerome Powell both confused and spooked markets during the subsequent press conference by categorizing the central bank’s cut — the first of its kind since 2008 — as a “midcycle adjustment,” dashing hopes that additional cuts are guaranteed.
Almost half of the Fed’s 12 reserve bank presidents said they weren’t confident about cutting rates ahead of the July meeting despite worsening global economic growth forecasts and several tepid inflation metrics.
Traders are also likely to closely monitor the Fed’s annual Jackson Hole seminar later this week and a Group of Seven (G-7) summit at the weekend for clues on what additional steps policymakers will take to boost economic growth.
— CNBC’s Jeff Cox contributed reporting.
U.S. Markets Overview: Treasurys chart
|US 3-MO||U.S. 3 Month Treasury||1.977||0.026||0.00|
|US 1-YR||U.S. 1 Year Treasury||1.779||0.044||0.00|
|US 2-YR||U.S. 2 Year Treasury||1.569||0.055||0.00|
|US 5-YR||U.S. 5 Year Treasury||1.47||0.039||0.00|
|US 10-YR||U.S. 10 Year Treasury||1.584||0.025||0.00|
|US 30-YR||U.S. 30 Year Treasury||2.07||0.027||0.00|