The two-year Treasury yield hit its highest level in nearly a decade Monday morning, leaving investors questioning what this could signal for America’s economy in the longer term.
The short-term Treasury yield rose to 2.386 percent on Monday morning — the highest level on record since August of 2008. Meanwhile, the 10-year Treasury yield also rose to a three-week high at 2.86 percent. Yields move inversely to bond prices.
The move came as the U.S. and Russia avoided any direct conflict in Syria following airstrikes by Western nations on Saturday morning. But, the sell-off in bonds left some investors feeling nervous that it could spell trouble for the U.S. economy. Every time the short-term yield comes closer to the 10-year — in what market participants describe as “flattening of the yield curve” — there are worries that an economic recession could be on the horizon. This is because higher short-term yields suggest that inflation and interest rates are expected to remain low for a while.
A flattening of the yield curve has preceded financial crises in the past, including the dotcom bust and the financial crisis of 2008. However, some market experts believe that this is no longer the best way to assess risk of a recession. Saker Nusseibeh, chief executive at Hermes Investment Management, told CNBC’s “Squawk Box Europe” that he expects a reversal of the recent move.
“We should expect a steepening of the yield curve. We do not see any indications of the U.S. economy entering anything like a possible recession,” he said.
A steepening of the yield curve traditionally means that market players expect higher inflation and thus higher interest rates from the U.S. central bank. It also indicates an expectation of a stronger economy.
“What we do see is clear indication of a stronger-than-anticipated U.S. economy … And possibly a sharper steepening than people thought might happen,” Nusseibeh added.
In late March, revised data showed a growth rate of 2.9 percent in the last quarter of 2017 for the U.S. The U.S. unemployment rate is currently at a 17-year low.
Federal Reserve Chairman Jerome Powell said in February that the bank would prevent the economy from overheating by raising rates at a gradual pace. Markets are expecting at least three rate hikes in 2018, with the next one taking place at the June meeting.
Link to the source of information: www.cnbc.com
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