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(Bloomberg) \u2014 A key segment of the US Treasury yield curve briefly turned positive as weaker-than-anticipated labor-market data bolstered bets on steep interest-rate cuts by the Federal Reserve.<\/p>\n
Treasuries jumped on Wednesday \u2014 led by shorter-maturity notes that are more sensitive to the Fed\u2019s monetary policy \u2014 after\u00a0US job openings fell<\/a>\u00a0in July to the lowest since the start of 2021. That pushed the US two-year note\u2019s yield momentarily below the 10-year note\u2019s for only the second time since 2022 as traders built up wagers on a super-sized rate reduction this month.<\/p>\n \u201cThe Fed probably needs to move sooner and maybe even by 50\u201d basis points, said John Fath, managing partner at BTG Pactual Asset Management US LLC. \u201cIf they do, then the curve should disinvert completely.\u201d<\/p>\n Interest-rate swaps showed traders have fully priced in a quarter-point rate cut at the Fed policy meeting this month \u2014 and a more than 30% chance of a half-point reduction. A total of 107 basis points of easing is expected for the remaining three meetings this year.<\/p>\n Across Wall Street, economists and money managers have been scouring economic data for signs of weakness that would force the Fed to kick off an aggressive rate-cutting cycle.<\/p>\n The decline in openings seen in Wednesday\u2019s data adds to recent evidence the labor market is softening, which has raised concern among Fed officials. Job growth has been slowing, unemployment is rising and job seekers are having greater difficulty finding work, fueling fears about a\u00a0potential recession<\/a>.<\/p>\n To Earl Davis, head of fixed income at BMO Global Asset Management, evidence of softness in the US labor market is significant as it \u201clowers the bar for Fed\u201d to slash rates by a half-point later this month.\u00a0<\/p>\n \u201cOnce they start with 50, it won\u2019t be one-off,\u201d he said. \u201cThere\u2019s ample room for them to cut.\u201d<\/p>\n A measure of expected volatility in US rates derived from options on swaps also has surged as traders see more scope for Fed interest-rate cuts.<\/p>\n The Treasury yield curve also sent a brief signal about the risk of a US downturn.\u00a0<\/p>\n Historically, bond yield curves slope upward with investors seeking higher yield, or return, for the uncertainty of stashing their cash in longer-maturity Treasuries.<\/p>\n But in March 2022, the yield curve inverted as the Fed kicked off what proved to be its most aggressive tightening cycle in decades. Two-year yields went on to exceed the 10-year by as much as 111 basis points in March 2023, the biggest inversion since the early 1980s.<\/p>\n A restoration of the normal upward slope of the yield curve following a long period of inversion \u00a0has typically happened when the Fed starts to lower interest rates. Since the Fed tends to ease policy when the economy hits a snag, such disinversion has heightened investors\u2019 concern about recession.<\/p>\n \u201cI like to say that once the yield curve goes positive, it tends to start the clock on the recession,\u201d said Ryan Hayhurst, president of Oklahoma City-based The Baker Group, which advises over 1,000 community banks and credit unions across the country.<\/p>\n For decades, however, strategists and even some Fed officials have downplayed the\u00a0predictive power<\/a>\u00a0of the yield curve.\u00a0<\/p>\n Prior to the pandemic, many on Wall Street warned the inversion\u2019s recessionary signal was distorted as a result of the central bank keeping rates exceptionally low. And last year, a Bank of America<\/a> strategist said the inversion was being driven by expectations for a hard landing for inflation as the Fed did its job to rein in price pressures through tight policy.<\/p>\n Now, though, disinversion of the curve is in focus, with two-year yields moving down closer to 10-year\u2019s for months.\u00a0<\/p>\n \u201cIt\u2019s a healthy thing that should be cheered,\u201d said Jerome Schneider, head of short-term portfolio management and funding at Pacific Investment Management Co. \u201cA normal yield curve shape is indicative of a business and monetary-policy climate that is closer to normal and balanced.\u201d<\/p>\n On Aug. 5, the curve also briefly normalized on an\u00a0intraday<\/a>\u00a0basis. While two-year yields quickly moved back above 10-year yields on Wednesday, the remaining gap is less than a basis point.\u00a0<\/p>\n \u201cThe unreliability of the signal from an inverted yield curve also means a disinversion doesn\u2019t necessarily mean \u2013 as it typically used to \u2013 a recession is imminent.\u201d<\/p>\n \u2014 Simon White, macro strategist. Read more on MLIV.<\/p>\n<\/blockquote>\n \u201cThe disinversion of the curve makes a lot of sense as we are on the eve of the Fed starting to cut rates,\u201d said Priya Misra, portfolio manager at JPMorgan Asset Management. The amount of easing priced in the market is \u201cconsistent with a Fed that wants to normalize rates to preserve the soft landing that we are currently in,\u201d she added.<\/p>\n In a\u00a0speech<\/a>\u00a0at Jackson Hole last month, Fed Chairman Jerome Powell made clear that he intends to prevent the job market from cooling further and that the time has come for the central bank to reduce its key policy rate. That puts attention on an important US labor report on Friday.<\/p>\n The Friday data stands to be the \u201cmain determinant\u201d as to whether the Fed opts for a jumbo 50-basis-point cut over a more paced quarter-point approach, said Steven Zeng, a US rates strategist at Deutsche Bank<\/a>.\u00a0<\/p>\n<\/div>\nA More-Normal Yield Curve<\/h3>\n
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