A widely followed bond market barometer of economic sentiment stirred fears of slowing U.S. economic growth on Tuesday as traders braced for the Federal Reserve raising interest rates at its meeting this month.
The yield curve— which reflects the difference between shorter and longer-term U.S. borrowing rates — fell to an 11-year low. When short-term bond yields rise above long-term ones it is seen by some investors as an indicator that monetary policy is too tight.
The difference between two and 10-year Treasury yields dropped to under 12 basis points on Tuesday, its lowest level since June 2007. Monday’s 5bp decline was the measure’s biggest fall since March.
“People perceive the Fed will continue to tighten despite a possible slowdown,” said Tom di Galoma, a managing director at Seaport Global Securities. “It’s all adding up to an inversion of the yield curve. That points to a recession coming in the next 12 to 18 months.”
Recent market ructions, coupled with a more cautious tone from Fed chairman Jay Powell last week, have weighed on longer-dated Treasury yields and led traders to price in fewer US rate increases in the coming year.
Read more in the Milwaukee Business Journal.
For banks, a yield curve inversion presents several challenges, including margin compression and the fallout from a potential recession. The best way to mitigate these risks is to develop an action plan now that can be utilized if an inversion occurs. The December edition of Wisconsin Banker featured an in-depth article exploring those challenges. Read Are You Ready for an Inversion? here.