https://www.marketwatch.com/story/b...n-way-to-fresh-four-decade-milestone-41448336
The widely followed spread between 2- and 10-year Treasury yields finished the New York session at minus 109 basis points, a day after ending in triple-digit negative territory for the first time since Sept. 22, 1981.
A negative 2s/10s spread simply means that the policy-sensitive 2-year rate
BX:TMUBMUSD02Y is trading far above the benchmark 10-year yield
BX:TMUBMUSD10Y, as traders and investors factor in higher interest rates in the near term and some combination of slower economic growth, lower inflation, and possible interest-rate cuts over the longer term.
The spread hasn’t been this deeply inverted since it reached minus 121.4 basis points more than 40 years ago, when the fed-funds rate was 19% under then-Federal Reserve Chairman Paul Volcker.
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This week’s triple-digit inversion in the 2s/10s spread was largely driven by the rise in the 2-year rate, which ended the New York session above 5% on Tuesday for the first time since June 18, 2007
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The Fed chairman’s focus on the need for higher rates came as Senate lawmakers repeatedly asked him on Tuesday whether interest rates are the only tool available to policy makers for controlling inflation. Powell replied that interest rates are the main tool, demurring from an opportunity to discuss the Fed’s quantitative tightening process —
or shrinking of the central bank’s $8.34 trillion balance sheet — in more detail.
QT was once seen as a supplement to rate increases, with one economist at the Fed’s Atlanta branch estimating that a $2.2 trillion passive roll-off of nominal Treasury securities over three years would be equivalent to a 74-basis-point rate hike during turbulent times.
But tinkering with QT now and accelerating the pace of that process would be a “can of worms the Fed doesn’t really want to open,” said Marios Hadjikyriacos, senior investment analyst at Cyprus-based multiasset brokerage XM.
That would “drain excess liquidity out of the system and tighten financial conditions faster, helping to transmit the stance of monetary more effectively,
but the scars of the ‘taper tantrum’ and the 2019 repo crisis have made Fed officials wary of deploying this tool in an active manner.”
