Breadth divergence is a troubling sign for the stock market

U.S. bond prices dip, leaving yield curve inverted ahead of Fed minutes

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U.S. bond prices nudged lower on Wednesday, leaving the Treasury yield curve inverted, as traders waited for the latest update on Federal Reserve thinking.

What’s happening
What’s driving markets

The bond market is signaling that a U.S. economic downturn is likely.

The Fed is being forced to raise short term interest rates to combat rampant inflation, and this is reflected in higher 2-year bond yields. Meanwhile, traders reckon the Fed’s action will contribute to weaker economic growth in the longer run, and so 10-year yields are now dipping in response.

Such a yield curve inversion is taken by traders as a potential harbinger of recession, and investors will be keen to see if the Federal Reserve has anything more to say on that prognosis when it releases the minutes of its June meeting at 2 p.m. Eastern Time on Wednesday. The G&P Global June service sector purchasing managers survey is due at 9.45 am ET and the ISM services sector index and job opening data are due at 10 a.m. ET.

“With increasing anticipation of an incoming recession in the U.S., the front end of the U.S. yield curve is now pricing in a 3.33% terminal rate in the Fed Fund in this rate hike cycle, nearly half a percentage point below the median projection of 3.8% by the Fed in its June FOMC dot-plots,” said the strategy team at Saxo Bank.

The sharp change in focus in recent weeks from inflation-fretting to recession-angst has particularly rattled the longer end of the Treasury yield curve. The 10-year bond yield has plunged more than 60 basis points since the middle of June.

Such action is reflected in the ICE BofA MOVE index, a gauge of Treasury volatility, which this week climbed to its highest since the outset of the COVID-19 pandemic, according to Bloomberg.

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