Is the Bond Market Headed for an Inverted Yield Curve?

The seven- and 10-year yield spread was modestly wider at 4.1 basis points Wednesday as the long end of the curve underperformed. Analysts with Action Economics (AE) noted that with next week’s new Treasury supply as well as month- and quarter-end activity, the curve could invert. The seven- 10-years dropped to 2.9 bps last week, which was the smallest going back to 2009 when the seven-year maturity was reintroduced on the Treasury’s financing schedule. The year’s wide was 10 bps.

Treasury will auction two- five- and seven-year notes next Tuesday, Wednesday and Thursday, respectively, and any auction set up, and/or tepid demand could see prices fall/yields rise. Additionally, month- and quarter-end and that augers for some demand for longer duration. Barclays estimates its July 1 Treasury index extends out 0.06 years, fractionally below the 0.07 year in July 2017, but is in line with the 10-year average.

There is some concern that this spread will be the harbinger of further tightening and eventual inversion in the two- and 10-year and/or the five-and 30-year spreads, which are currently trading near 34 bps and 26 bps, respectively. The Federal Reserve has clearly noted the narrowing curve trends, but most policymakers have cautioned against reading too much into a possible inversion, which last time it occurred presaged the financial crisis and the Great Recession along with every recession since 1955, according to Bloomberg data.

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