TREASURIES-U.S. Treasury curve briefly inverts as recession worries mount

BY Reuters | TREASURY | 07/05/22 04:52 AM EDT

LONDON, July 5 (Reuters) - A key part of the U.S. Treasury yield curve briefly inverted for the first time since mid-June on Tuesday, reflecting investor concern that hefty interest-rate hikes could tip the U.S. economy into a recession.

Though money markets are nearly unanimous in pricing an aggressive 75 bps rate rise from the U.S. Federal Reserve later this month, expectations of where rates would peak in mid-2023 have cooled considerably to 3.2% from above 4% in early June.

Nomura economists expect the U.S economy to tip into recession from the final quarter of 2022.

Recession angst was also reflected in the Treasury market.

The gap between two and 10-year government bonds, a closely-watched indicator of recession risk, briefly inverted for the first time in almost three weeks. It narrowed to -0.40 basis points briefly, before widening back to around 2 bps .

Still, that spread has collapsed from nearly 31 bps in early June.

Ten-year U.S. Treasury yields rose to as high as 2.978%, versus Friday's close of 2.90%, playing catch up with a broader rise in European government debt yields after cash trading resumed after Monday's July 4 holiday.

But as the London session gathered momentum, 10-year yields fell back and were last down around 2 bps on the day at 2.89%. Short-dated yields remained higher.

Inflation expectations from the bond market have also tumbled. Breakevens for 5-year maturities held around 2.63%, just above an October 2021 low of 2.59% hit last week. (Reporting by Saikat Chatterjee; Editing by Dhara Ranasinghe)

In general the bond market is volatile, and fixed income securities carry interest rate risk. (As interest rates rise, bond prices usually fall, and vice versa. This effect is usually more pronounced for longer-term securities.) Fixed income securities also carry inflation risk and credit and default risks for both issuers and counterparties. Unlike individual bonds, most bond funds do not have a maturity date, so avoiding losses caused by price volatility by holding them until maturity is not possible.

Lower-quality debt securities generally offer higher yields, but also involve greater risk of default or price changes due to potential changes in the credit quality of the issuer. Any fixed income security sold or redeemed prior to maturity may be subject to loss.

Before investing, consider the funds' investment objectives, risks, charges, and expenses. Contact Fidelity for a prospectus or, if available, a summary prospectus containing this information. Read it carefully.

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