Bonds

Yield curve briefly inverts again with 2-year Treasury yield topping 10-year rate

The spread between the yield on the 10-year Treasury note and that of the 2-year note on Wednesday turned negative for the second time in one week, a recession warning that flashed for the first time since 2005 on Aug. 14.

The inverted bond-market spread is seen by many veteran traders as an important recession omen, though the timing on the eventual downturn is less predictable. Shortly before 4 p.m. ET, the yield on the benchmark 10-year Treasury note was below the 2-year Treasury note yield by a hair. The spread then quickly widened again and was last seen at a positive 1.8 basis points with the 10-year yield at 1.587% and the 2-year rate at 1.569%. A basis point is 0.01 percent.

Fears of an economic slowdown appeared to resurface Wednesday afternoon, when the release of the Federal Reserve's July meeting minutes reiterated officials' belief that its July rate cut was just a "mid-cycle adjustment."

Central bank officials who voted to lower interest rates late last month agreed that the move shouldn't be interpreted as a predecessor to more rate cuts or a "pre-set course" for the overnight lending costs.

"In their discussion of the outlook for monetary policy beyond this meeting, participants generally favored an approach in which policy would be guided by incoming information and its implications for the economic outlook and that avoided any appearance of following a pre-set course," the minutes stated.

The comments raised some fears that the Fed would not do enough to rescue the economy from a recession.

I would not read too much into yield curve inversion: Former IMF chief economist
VIDEO4:3104:31
I would not read too much into yield curve inversion: Former IMF chief economist

However, last week's inversion set off a debate about the reliability of the indicator. Even when it does predict a recession, it is, on average, 22 months early, according to Credit Suisse.

The marketplace hysteria following the initial inversion even drew commentary from the White House.

President Donald Trump took to Twitter to voice his concerns about the "CRAZY INVERTED YIELD CURVE!" and again blasted the Fed for what he views as too-high interest rates.

Economists consider the spread between the 10-year and the 2-year of great importance because inversions of that part of the curve have preceded every recession over the past 50 years. The last five 2-10 inversions have eventually led to recessions.

trump tweet

But Trump isn't the only one concerned about the direction of interest-rate policy and the Federal Open Market Committee, the Fed's policymaking arm.

If the FOMC doesn't indicate strong urgency to cut very aggressively and that we're back to that world of slowing growth and weak inflation, the Fed runs "the risk of not providing as much support as needed, which is the recipe for yield curve inversion," said Jon Hill, rates strategist at BMO Capital Markets.

Still, investors widely expect the Fed to cut interest rates again before the end of the year after voting to reduce the overnight lending rate by 25 basis points in July. Federal funds futures following the release of the minutes implied traders see a 98% chance of a 25 basis point cut at the central bank's Sept. 17-18 policy meeting.

Yield curve briefly inverts for the first time since August 15
VIDEO1:1001:10
Yield curve briefly inverts for the first time since August 15

At that time, the Fed's policymaking committee cited "implications of global developments for the economic outlook as well as muted inflation pressures." The committee called the current state of growth "moderate" and the labor market "strong," but decided to loosen policy anyway.

But Chairman Jerome Powell both confused and spooked markets during the subsequent press conference by categorizing the central bank's cut — the first of its kind since 2008 — as a "midcycle adjustment," dashing hopes that additional cuts are guaranteed.

Almost half of the Fed's 12 reserve bank presidents said they weren't confident about cutting rates ahead of the July meeting despite worsening global economic growth forecasts and several tepid inflation metrics.

Traders are also likely to closely monitor the Fed's annual Jackson Hole seminar later this week and a Group of Seven (G-7) summit at the weekend for clues on what additional steps policymakers will take to boost economic growth.

— CNBC's Jeff Cox contributed reporting.

Treasurys