Yields on long-dated U.S. Treasuries have been erratic this year and this week, the 10-year Treasury yield crossed 3.5% for the first time in a decade. Following the Fed’s 75bps (basis points) rate hike, 10-year notes reached 3.642% and two-year Treasury notes jumped to a 15-year high at 4.090%. The curve between the two- and 10-year notes indicates the chances of a deep U.S. recession have grown stronger, and recent reports say bond traders have been “confronted with the wildest volatility of their careers.”
2 Quarters of Negative GDP, Red-Hot Inflation, and Extremely Volatile T-Notes
At the end of July, after the second consecutive quarter of negative gross domestic product (GDP), a number of economists and market strategists stressed that the U.S. is in a recession. However, the Biden administration disagreed and the White House published an article which defines the start of a recession from the National Bureau of Economic Research’s perspective. Additionally, red-hot inflation has been wreaking havoc on Americans, and market analysts believe that rising consumer prices also point to a recession in the United States.
One of the biggest signals, however, is the yield curve which measures long-term debt with short-term debt by monitoring two and 10-year Treasury note yields. Many analysts believe an inverted yield curve is one of the strongest signals that points to a recession. The inverted yield curve is unusual but not in 2022, as bond traders have been dealing with a crazy trading environment this year. This week, two- and 10-year Treasury note (T-note) yields broke records as the 10-year T-note surpassed 3.5% on September 19, for the first time since 2011. On the same day, the two-year T-note tapped a 15-year high reaching 3.97% for the first time since 2007.
Despite the fact that such bond market volatility is usually a sign of a weakening economy in the U.S., professional traders claim bond markets have been exciting and “fun.” Bloomberg authors Michael MacKenzie and Liz Capo McCormick say bond markets are “characterized by sudden and sweeping daily swings that are typically a favorable environment for traders and dealers.” Paul Hamill, the head of global fixed income, currencies, and commodities distribution at Citadel Securities agrees with the Bloomberg reporters.
“We are right in the sweet spot of rates really being an…
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