US 2-Year Treasury Yield Surpasses 5%... Widening of Inversion Between Short and Long-Term Rates

The yield on the 2-year U.S. Treasury note, which is sensitive to monetary policy, surpassed the 5% level for the first time since 2007. This comes as Federal Reserve (Fed) Chair Jerome Powell indicated readiness to accelerate the pace of rate hikes, raising concerns about tightening.

According to economic media CNBC, as of the afternoon of the 7th (local time) in the New York bond market, the 2-year yield was trading at 5.015%, up 12 basis points from the previous session. CNBC reported this as the highest level since 2007. The 10-year yield briefly exceeded 4% earlier in the day following Powell’s hawkish remarks but later eased to around 3.97%.

The inversion between the 10-year and 2-year yields widened to more than 1 percentage point, marking the largest gap since 1981. The yield curve inversion, where the long-term 10-year yield falls below the short-term 2-year yield, is generally considered a precursor to a recession.

This development followed Powell’s unexpectedly hawkish tone during his testimony before the Senate Banking Committee that day. Powell stated, "Recent economic indicators have all come in stronger than expected," adding, "This suggests that the terminal rate may be higher than previously anticipated." He emphasized, "If the overall data require faster tightening, we are prepared to increase the pace of rate hikes." He further noted, "There is still a long way to go to bring down inflation," and added, "Maintaining a restrictive monetary policy stance for some time is necessary to restore price stability."

These remarks are interpreted as leaving the door open for a big rate hike at the Federal Open Market Committee (FOMC) meeting scheduled for March 21-22. Since March last year, the Fed has raised U.S. interest rates to the highest level since 2007, between 4.5% and 4.75%, through its tightening cycle. Following Powell’s comments, it is widely expected that the Fed’s dot plot indicating the path of rate hikes at the March FOMC will be revised upward.

According to the Chicago Mercantile Exchange (CME) FedWatch tool, the federal funds (FF) futures market currently prices in nearly a 70% probability of a big rate hike in March. This is a sharp increase from around 31% the previous day and only about 9% a month ago. Additionally, futures markets are pricing in the highest likelihood that the terminal rate this summer will reach 5.5% to 5.75%. Considering the current U.S. rate range of 4.5% to 4.75%, this implies a potential additional 1 percentage point increase in the future.

This content was produced with the assistance of AI translation services.