The US 02-yr Treasury note jumped today, trading at levels last seen in November 2007. It's trading near 3.85%, reflecting market expectations of at least a 75bps hike next week. Some participants have discussed a 100bps increase, reflecting as a 26% probability presently.
However, this has caused the 02-10s yield curve to invert further. The spread is currently -0.4%; this is the 53rd day of inversion. The longer this persists and the deeper the inversion, the greater the likelihood of a recession. In other words, the less chance of a soft landing.
This likelihood is because higher rates contribute to demand destruction at the aggregate level. Moreover, the required rate of return will remain high, exerting pressure on discount factors. As such, income-generating havens will likely remain supported in the near to medium term, keeping longer-term yields dampened.
Senior Market Specialist
Russell Shor joined FXCM in October 2017 as a Senior Market Specialist. He is a certified FMVA® and has an Honours Degree in Economics from the University of South Africa. Russell is a full member of the Society of Technical Analysts in the United Kingdom. With over 20 years of financial markets experience, his analysis is of a high standard and quality.