NEW YORK — The yield curve inverted
further on Wednesday after the Federal Reserve hiked rates by 75
basis points and signaled more increases are to come, adding to
fears about an economic downturn.
Yields initially surged, with benchmark 10-year notes
hitting the highest levels since 2011 and two-year yields the
highest since 2007, after the U.S. central bank’s target
interest rate was increased to a range of 3.00%-3.25% and new
projections showed its policy rate rising to 4.40% by the end of
this year before topping out at 4.60% in 2023.
Fed Chairman Jerome Powell said in comments after the
statement that central bank officials are “strongly resolved” to
bring down inflation from the highest levels in four decades and
“will keep at it until the job is done.”
“Until there is a major slowdown in inflation, the Fed will
continue to hike. Financial markets are finally getting the
message that the Fed will not blink,” said Kevin Nicholson,
Global Fixed Income chief investment officer at Riverfront
Investment Group in Virginia.
But yields retraced from their highs after Powell said that
the so-called “dot plot” of rate and economic expectations do
not represent a plan or commitment, underscoring the difficulty
in forecasting the path of the economy.
“With recession looking virtually impossible to avoid, we
see a strong chance of policy reversal later in 2023,” analysts
at ING said in a note, adding that “despite the hawkishness of
the Fed today, the market is tentatively pricing in nearly 50bp
of rate cuts in 2023.”
The Fed’s economic projections showed the economy slowing to
a crawl in 2022, with year-end growth at 0.2%, rising to 1.2% in
2023, well below the economy’s potential. The unemployment rate
is projected to rise to 3.8% this year and 4.4% in 2023.
Inflation is seen slowly returning to the Fed’s 2% target in
Two-year Treasury yields were last 4.042%, after
earlier reaching 4.123%, the highest since October 2007.
Benchmark 10-year U.S. Treasury yields were 3.520%,
after earlier hitting 3.640%, the highest since February 2011.
The closely watched yield curve between two-year and 10-year
notes inverted further to minus 53 basis points,
indicating concerns about a recession in the next one-to-two
The curve between five-year and 30-year bonds
also inverted to minus 29 basis points, the deepest inversion
Real yields, which adjust for expected inflation, also
jumped but ended the day off their highs.
Five-year yields on Treasury Inflation-Protected Securities
(TIPS) fell to 1.305%, from a high of a 1.422%, the
highest since August 2009. Ten-year TIPS yields
were last 1.153%, after reaching 1.246%, the highest since
Yields had eased earlier on Wednesday as concerns about an
escalation of the war between Russia and Ukraine modestly
boosted demand for safe haven U.S. debt.
President Vladimir Putin ordered Russia’s first wartime
mobilization since World War Two on Wednesday, shocking his
countrymen with what Western countries described as an act of
desperation in the face of a losing war.
September 21 Wednesday 4:03PM New York / 2003 GMT
Price Current Net
Yield % Change
Three-month bills 3.2125 3.2838 -0.064
Six-month bills 3.7725 3.8993 -0.003
Two-year note 98-137/256 4.042 0.078
Three-year note 98-160/256 3.9937 0.057
Five-year note 97-52/256 3.7503 -0.003
Seven-year note 96-184/256 3.6646 -0.031
10-year note 93-156/256 3.5201 -0.053
20-year bond 94-216/256 3.7447 -0.100
30-year bond 90-244/256 3.4897 -0.091
DOLLAR SWAP SPREADS
Last (bps) Net
U.S. 2-year dollar swap 41.00 3.00
U.S. 3-year dollar swap 19.75 1.75
U.S. 5-year dollar swap 9.25 0.50
U.S. 10-year dollar swap 6.50 0.00
U.S. 30-year dollar swap -31.00 -0.25
(Additional reporting by Michelle Price in Washington; editing
by Jonathan Oatis)