Treasury Yields Jump as Fed Hints at Another Big Hike at Next Meeting

Source: NYSE

U.S. Treasury yields swung higher on Wednesday, but the closely watched 2-year/10-year yield curve remained inverted, a key recession warning.

The yield on the benchmark 10-year Treasury note rose more than 11 basis points to 2.924%, while the yield on the 30-year Treasury bond was up nearly 10 basis points at 3.126%. Yields move inversely to prices, and a basis point is equal to 0.01%.

Market pros track the spread between longer duration Treasury yields and shorter duration yields, with the former typically higher. However, the 2-year Treasury yield climbed 15 basis points to 2.967% on Wednesday, holding above the 10-year.

That so-called inversion, particularly if sustained, is often interpreted as a warning sign that the economy may be weakening and a recession could be on the horizon. The 2-year to 10-year curve first inverted March 31, then again briefly in June.

Treasury yields pushed higher on Wednesday after the release of the latest Federal Reserve meeting minutes. The documents showed that the central bank was leaning toward another 75-basis point rate hike this month as it focuses on bringing down inflation.

The market has become increasingly concerned about the potential for recession in recent weeks as economic data has weakened, while Fed Chairman Jerome Powell has committed to aggressive action to fight soaring inflation. Should the central bank hike interest rates too sharply, the subsequent slowing of the economy could tip into recession.

Even with the big moves up on Wednesday, yields are still well off their highs. The potential for an economic slowdown could mean that Treasury yields have already hit their highs of the year, according to fixed income strategists at Charles Schwab.

"The 10-year Treasury yield tends to peak near the peak Fed funds rate of a given cycle. Market expectations point to a 3.3% terminal rate, which is consistent with the peak in 10-year yields year to date. However, softening growth and inflation expectations suggest the 10- year yield near 3% has limited upside, and may actually decline in the second half of the year," the strategists said in a note.

Several notable data points came in higher than expected on Wednesday morning, including June's ISM non-manufacturing PMI reading and May's JOLTs job openings.

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