Investors continued to digest the higher-than-expected inflation print of 9.1% for June as Treasury yields moved higher Thursday morning.
In other words, the 2-year Treasury yield, more sensitive to monetary policy changes than its longer-term counterparts, increased 7 basis points to 3.213%. Inversions between the 10-year and 2-year notes have remained wide, and on Wednesday they reached their biggest since 2000. If a country’s yield curve, the line illustrating what the various interest rates would be for various maturity dates of its bonds, reverses, when short-term rates are higher than long-term rates, then that is seen as a signal that an economic downturn is coming.
Ten-year Treasury note rates rose six basis points to 2.967%, whereas the 30-year Treasury yields climbed just under six basis points to 3.126%. There is a correlation between price and yield and one basis point is equal to 0.01%.
The producer price index, or the core producer price index, will be released for June on Thursday, as well as the month-over-month and year-over-year PPI. A PPI is a measure of the average change in price, by domestic producers, from month to month. Moreover, jobless claims will be released, along with unemployment figures.
According to some analysts, the Federal Reserve could deploy a hundred-point hike in the U.S. interest rate to fight inflation. This is the highest inflation rate in 40 years in the U.S. when asked by reporters about the likelihood of the hike, Atlanta Fed President Raphael Bostic replied, “Everything is in play.”
Bank of America economists said Wednesday that they believe the U.S. will go into a mild recession this year. This data points to the economic slump, slowed momentum, and what seems to be inflation holding back consumer spending.
Should You Really Worry About That?
The Chairman of the Federal Reserve, Jerome Powell, would say no. In a recent interview, the economist stated that he pays more attention to the first 18 months of the yield curve than the difference between the two-year and 10-year yields.
“That has 100% of the explanatory power of the yield curve,” he said, and it’s not inverted.
Two-year and 10-year Treasury yields inverted twice this year, but those may just be temporary blips rather than a long-term trend.
Some investors, however, are worried about a recession or the possibility of “stagflation,” which would be the painful combination of high unemployment and high inflation.
As you can see from the yield curve, the bond market is also more pessimistic.
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