Change in US government bond yields leaves investors uncertain

“In fact, the last four recessions only started when the curve turned positive again,” he said.

But James Reilly, an economist at Capital Economics, said that while spread deactivation “has historically typically preceded recessions… this move in yields is more a symptom of investor concerns than a new cause for concern.”

“The Treasury yield curve has steepened in recent weeks on rising recession fears, but we doubt that will materialize this time,” he said.

Short-term yields have historically tended to be lower than long-term yields, reflecting the higher risk of borrowing for longer periods. When short-term loans cost more than long-term ones, it means investors expect growth—and therefore interest rates—to be lower in the coming years.

Swap markets fully expect a quarter-percentage-point rate cut from the current range of 5.25% to 5.5% at the Fed’s meeting later this month, and are pricing in a 40% chance of a half-percentage-point cut. They expect cuts of just over one percentage point by the end of December.

Labor data released on Wednesday showed the number of U.S. job openings in July was lower than expected, prompting another sharp rally in short-term government bonds.

Job vacancies and turnover data showed the number of U.S. job openings fell to 7.7 million in July, a three-year low and lower than economists had expected.

The yield on the two-year Treasury note briefly fell below the 10-year yield on Wednesday and then held in a narrow range just above the “inversion” threshold as investors expected the data to keep the Fed on track to cut interest rates this month.

“On the margin, the Jolts data does matter,” said Ajay Rajadhyaksha, global head of research at Barclays. “(The Fed) is taking this seriously; they’re not going to ignore it. The market knows it, and that’s why there was this short-term non-reversal.”

He added that it is not so much about the yield curve but rather the initial increase in anticipation of a faster cuts cycle.

Cementing investor expectations for looser monetary policy, Fed Chairman Jay Powell signaled at an economic conference in Jackson Hole in August that “the time has come” for U.S. interest rate cuts. He told the symposium that “downside risks” to the labor market had increased.

The yield curve briefly stopped inverting early last month after a much weaker-than-expected July jobs report raised fears of a looming recession and prompted investors to bet on quick and deep interest rate cuts.

Those concerns were later eased by a wave of improved economic reports, but market participants are closely monitoring every data indicator for clues about the future path of U.S. borrowing costs.

The latest nonfarm payroll data is due out Friday. Economists expect U.S. employers added 160,000 jobs in August, according to a Reuters poll — up significantly from 114,000 the previous month.

“We think the front end may have gone up a little too much,” Skiba added. “We had trouble seeing the Fed cutting rates by more than (one percentage point) in the absence of significantly worse economic data — but it’s clear that’s where the debate is from a market perspective at this stage.”

– Financial Times