US curve inversion deepens to one percentage point after Powell

(Bloomberg) – Bond investors’ concern about a possible U.S. recession deepened after Federal Reserve Chairman Jerome Powell signaled that policymakers could continue to push interest rates higher.

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Yields on two-year Treasuries topped those on 10-year Treasuries by nearly a full percentage point on Wednesday after short-term rates rose following Powell’s congressional testimony. The two-10 segment of the yield curve – which inverted before each of the last five US recessions – is now the most inverted since March.

The impact of Powell’s testimony may have been exacerbated by faster-than-expected UK inflation data that added to speculation that the Bank of England will increase the pace of its tightening when it meets on Thursday. A number of developed central banks have become more hawkish this month amid concerns that inflation will remain too high for too long.

“The UK is sending a signal that it’s too early to say central bank rate hikes have been enough to keep the inflation genie in the bottle,” said Prashant Newnaha, rates strategist at TD Securities Inc. in Singapore. “In the battle of growth versus inflation, inflation wins hands down, which means central banks are likely to risk a severe downturn to win the battle of inflation.”

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As the Fed kept interest rates unchanged last week for the first time in more than a year, it surprised investors and economists by forecasting that it would likely raise borrowing costs twice as much. end of the year. Powell reiterated that message during congressional testimony on Wednesday, noting that most U.S. policymakers expect more hikes to be needed as inflation remains well above the 2% target of the Fed.

The two-to-10 spread reversal had widened to 111 basis points on March 8, the most since the 1980s, before narrowing later that month as the collapse of several regional lenders Americans fueled concerns that a potential banking crisis would convince the Fed to start cutting rates.

–With the help of Liz Capo McCormick.

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