US two-year bond at high since 2007

Two-year U.S. Treasury yields hit a 15-year high today as investors reassessed their stance on a more extended period of aggressive Fed rate hikes that the Fed chief signaled on Friday.

The Fed will continue to raise interest rates in an effort to curb inflation, even if those hikes cause “financial pain” to households and businesses, Jay Powell said in Jackson Hole on Friday, taking the plainest tone with which he has appeared in his statements since the current tightening cycle began.

It is characteristic that after Powell’s speech the probability of a third consecutive giant increase of 75 basis points has now increased to 70%, as shown by bets on the futures of the interest rates of the federal bank, with that for a milder one of the order of 50 bp. to have declined respectively to 30%.

In this climate, his performance two years USAwhich is traditionally more sensitive to expectations of interest rate hikes, saw its performance today reach 3.489%strengthened by 8 basis points, having been at its highest level since 2007 and the eve of the global financial crisis.

Likewise, his performance 10-year US has also increased by 8 basis points in 3.13%however it remains quite far from the highs reached in mid-June at 3.49%.

“Although Powell gave few new signals on the pace of hikes in the coming meetings, he reinforced the position that economic conditions will need to tighten further and that interest rates will be kept at mildly restrictive levels for some time,” noted Lars Sparreso Lykke Merklin, Senior Analyst at Danske Bank.

Notably, after Powell’s speech, bets on the Fed’s current rate hike cycle now point to it peaking at 3.9% next May, up from the 3.6% the market was pricing in two weeks earlier.

In addition, the closely-watched bond yield curve between the US 10-year and 2-year US remains sharply inverted, with the yield on short-term notes higher by more than 35 basis points.

It is recalled that the inversion of the curve is usually seen as a sign of an impending recession, as it shows that investors do not trust the short-term prospects of the economy.