Ten-year Treasurys yields hit a nearly three-year high today following comments from Federal Reserve Gov. Lael Brainard. It appears the Fed is willing to be even more aggressive in reducing its balance sheet ahead of impending interest rate hikes.
So, what else do you need to know about Treasury yields today?
Earlier today, the 10-year Treasury yield reached 2.562%, the highest level since May 2019. This put some definitive space between the 10-year notes and the two-year notes, which yield 2.51%. The 10-year has since receded slightly; it is currently trending around 2.55%, while the two-year hovers around 2.52%.
Today’s action is likely in response to Brainard’s comments. In a speech today, Brainard emphasized the risk inflation presents to the economy. She also said that economic recovery was quickly underway.
“Inflation is much too high and is subject to upside risks. The Committee is prepared to take stronger action if indicators of inflation and inflation expectations indicate that such action is warranted.”
Why Are 10-Year Treasury Yields Soaring?
Brainard’s comments clearly came as an alarm to investors who quickly sold off bonds in response. This was likely reasonable. Brainard, typically a champion of nominal monetary engagement and low interest rates, has clearly felt a change lately.
The balance between the two- and 10-year Treasury yields is a major point of interest for economists and investors. When shorter-term Treasury yields rise above long-term yields it’s referred to as a “yield curve inversion.” This typically indicates an incoming recession. In fact, the 2-10 yield curve has inverted prior to every U.S. economic recession since the 1950s. As such, investors often look to the yield spread as a sort of pulse on investor sentiment and forthcoming economic conditions.
If you missed it, the 2-10 yields have inverted on three separate occasions in the past 12 days. This has lead some economists to predict an impending economic downturn. With interest rate hikes on the horizon, mounting inflation concerns, and geopolitically induced supply chain hiccups, this isn’t without cause.
With that said, you shouldn’t exactly view the Treasury yield spread as an instant “sell” sign. Many economists believe it could take as long as two years before the Treasury’s recession signal comes to fruition, if it does at all.
This Wednesday, the Fed is scheduled to release the minutes report from the body’s March policy meeting. Expect economists, investors and analysts everywhere to keep a close eye on the release for insight into the pace of interest rate hikes and subsequent economic conditions.
On the date of publication, Shrey Dua did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
