The Federal Reserve’s bid to contain the hottest inflation in decades will end in a recession. That’s the message the bond market is telegraphing.
Key sections of the Treasury curve have inverted after Friday’s US inflation shock drove traders to boost bets on the pace of Fed tightening. Two-year yields exceeded 10-year rates for the first time since April on Monday, while five-year yields soared as much as 17 basis points above 30-year rates in the widest inversion in over two decades.
Markets are pricing in a growing risk that the Fed will fail in its bid to engineer a soft landing for the world’s biggest economy, as the battle against inflation heats up. Swaps traders see more than 70% odds that US policy makers will deliver a 75-basis point hike this week -- the steepest increase since 1994 -- and there’s also talk of a one-percentage-point move.
“The US curve inversion is a clear sign that market participants see a real risk of recession,” said Andrew Ticehurst, a rates strategist at Nomura Holdings Inc. in Sydney. Nomura has been forecasting a terminal Fed funds rate of 3.75% to 4% and now “the market has shifted toward that,” he said.
Bonds and stocks have come crashing down this year as major central banks move forcefully to tame supply-driven cost pressures. The Bloomberg Global Aggregate index of bonds has dropped 15% since January while the MSCI All-Country World Index of equities slumped 20%, even when accounting for dividend payments.
This article was provided by Bloomberg News.