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Bond Report: 2-, 10-year Treasury yields post biggest four-session drops in two years as curve inverts on U.S. growth fears

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The two- and 10-year Treasury yields fell for a fourth straight trading day on Tuesday, posting their biggest declines over such a time frame since March 2020, as the U.S. yield curve inverted again on economic growth concerns.

The spread between 2- and 10-year Treasurys fell below zero during the session — the first inversion since June 14, according to FactSet data.

What’s happening

The yield on the 2-year Treasury
TMUBMUSD02Y,
2.832%

fell 2.9 basis points to 2.814% versus 2.843% as of Friday. That’s the lowest level since June 8.

The yield on the 10-year Treasury
TMUBMUSD10Y,
2.830%

dropped 9.3 basis points to 2.808% from 2.901% on Friday. That’s the lowest since May 27.

The 2-year yield has lost 30.8 basis points over the last four trading days, while the 10-year rate has dropped 39.8 basis points during that time, based on 3 p.m. levels, according to Dow Jones Market Data. Those are the largest four-day declines since March 2020.

The yield on the 30-year Treasury
TMUBMUSD30Y,
3.073%

fell 9.4 basis points to 3.032% from 3.126% on Friday. That’s the lowest since May 27.

What’s driving markets

Financial markets continued to focus on concerns about economic growth, supplanting inflation fears to some extent for now and sending the U.S. benchmark 10-year yield down 67.4 basis points from its multi-year peak of 3.482% on June 14.

The market is fearful that the Federal Reserve’s battle to suppress price gains — by quickly raising interest rates and reducing its balance sheet — may tip the world’s biggest economy into recession.

The result is a flattening yield curve and inversion— with the 2-year yield trading above the benchmark 10-year yield on Tuesday.

This week’s reports may provide further clues to the Fed’s policy trajectory. The most important data will likely be the June nonfarm payrolls survey published on Friday. Signs that the labor market is starting to feel the stress from higher borrowing costs could color the Fed’s thinking. See the economic calendar.

Data released on Tuesday showed that U.S. factory orders jumped 1.6% in May, above forecasts.

What analysts are saying

While the yield curve did invert, “we have yet to see a sustained inversion. As the Fed raises short term interest rates and the economy slows, we expect the yield curve to continue to flatten. This is a yellow flag for recession risk, but not yet a red flag,” said Carl Ludwigson, managing director of Bel Air Investment Advisors.

“Credit spreads have widened gradually suggesting incrementally higher default risk, which is also a yellow flag; however, we are not yet seeing signs of panic in CCC spreads,” Ludwigson said by email.

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