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U.S. two-year yield hits 15-year high after Powell’s rates warning

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HONG KONG — The U.S. two-year treasury yield hit its highest in 15 years on Monday, as investors repositioned for an extended period of aggressive interest rate hikes by the Federal Reserve following chair Jerome Powell’s hawkish speech on Friday.

The Fed will continue to raise rates in a bid to curtail inflation even as those rate increases cause pain for households and businesses, Powell said on Friday, in his bluntest language yet on the hiking-cycle.

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Market pricing now indicates a 70% chance the Fed will hike rates by 75 basis points at its September meeting.

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The two year yield, which is particularly sensitive to interest rate expectations, rose to as high as 3.466%, its highest since late 2007, up seven basis points from its Friday close.

Benchmark 10 year yields rose nearly 8 basis points to as high as 3.114% but remain well shy of their mid-June top of 3.499%.

The closely watched gap between the two remained strongly inverted at -35.7 basis points, often seen as a signal of an approaching recession

“Since we are looking at yield curve inversion remaining in place until we understand where the pain threshold for the Fed, we see more opportunities – in this rising yield environment – in the shorter duration,” said Carlos Casanova, senior economist Asia at UBP.

It is not just the Fed that’s talking up higher rates. European Central Bank board member Isabel Schnabel delivered a similar message over the weekend.

That triggered a sharp fall in Euribor futures, as markets priced in the risk the ECB could hike by 75 basis points next month. (Reporting by Alun John Editing by Shri Navaratnam)

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