Market Extra: Bond-market recession gauge plunges further into triple digits below zero after reaching four-decade milestone

by | Mar 8, 2023 | Stock Market

One of the bond market’s most reliable gauges of impending U.S. recessions plunged further into triple-digit negative territory on Wednesday, as Federal Reserve Chairman Jerome Powell reiterated the need for higher interest rates and a possible reacceleration in the pace of hikes.The widely followed spread between 2- and 10-year Treasury yields finished the New York session at minus 109 basis points, a day after ending in triple-digit negative territory for the first time since Sept. 22, 1981.

A negative 2s/10s spread simply means that the policy-sensitive 2-year rate BX:TMUBMUSD02Y is trading far above the benchmark 10-year yield BX:TMUBMUSD10Y, as traders and investors factor in higher interest rates in the near term and some combination of slower economic growth, lower inflation, and possible interest-rate cuts over the longer term. The spread hasn’t been this deeply inverted since it reached minus 121.4 basis points more than 40 years ago, when the fed-funds rate was 19% under then-Federal Reserve Chairman Paul Volcker. Powell surprised financial markets during his first day of congressional testimony in front of the Senate Banking Committee on Tuesday with more hawkish comments than many expected, sending the policy-sensitive 2-year rate above 5%. After his second day of testimony on Wednesday before the House Financial Services Committee, the 2-year yield jumped even further above 5%, to 5.06%, while the ICE U.S. Dollar Index DXY — which moves …

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