Key part of yield curve ‘inverts’ as short-term interest rates rise after jobs report

A significant portion of government bond yields reversed again on Friday, fueling fears that a recession could be in play after jobs data caused short-term interest rates to rise.

The 10-year Treasury benchmark rose more than 4 basis points to 2.371%, and the 2-year US Treasury yield rose 15 basis points to 2.432%.

Yields move inversely to prices and 1 basis point equals 0.01%.

Other parts of the yield curve also remained inverted. The yield on the 5-year government bond rose by 12 basis points to 2.539%, while the yield on the 30-year government bond fell by 2 basis points to 2.423%. 5- and 30-year yields reversed on Monday for the first time since 2006.

In the past, yield curve inversions have occurred before recessions, as investors selling short-term government bonds in favor of long-term government bonds worry about the health of the economy.

However, economists have pointed out that this indicator does not guarantee a recession and that it can take more than a year after the yield curve inverts before an economic downturn occurs.

“It seems like the front of the curve is such a different picture than the back of the curve. I think the market has accelerated a lot of rate hikes, and I think in some ways they’re pricing with a higher risk of an error of the Fed,” said Mark Heppenstall, president and chief investment officer of Penn Mutual Asset Management.

Heppenstall said he watched the relationship between the 10-year Treasuries and even shorter Treasuries than the 2-year curves more than the longer-running curves.

On the economic front, nonfarm payrolls rose 431,000 for the month, while the unemployment rate stood at 3.6%, the Bureau of Labor Statistics reported Friday. Economists polled by Dow Jones were looking for 490,000 on the payroll and 3.7% for the unemployment level.

The data has shown a strong economy for now, but investors are concerned they will also give the green light to the Federal Reserve to implement its aggressive plan to raise interest rates at every meeting this year. And those rate hikes could ultimately slow the economy down in the long run.

The 2- and 10-year parts of the yield curve reversed Thursday night for the first time since 2019. It then returned to normal overnight before Friday morning’s jobs report caused short-term interest rates to rise faster than long-term rates.

In addition to rising inflation during the Russia-Ukraine war, investors are concerned that the Federal Reserve’s plans to raise interest rates more aggressively to combat price pressures could send the economy into recession.

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“Ultimately, this will not stand in the way of the Fed,” said David Petrosinelli, senior trader at InspereX. “I think the Fed should do 50… [basis points]and you get more of a drum beat for 50.”

Developments in the war between Russia and Ukraine also remain under scrutiny, with talks between the two countries having made little progress so far.

Russian President Vladimir Putin has said foreign buyers of the country’s gas will have to pay for it in rubles from Friday.

Other economic news: February construction spending data and March manufacturing data from ISM came in below expectations.

No auctions are scheduled for Friday.

Slice Mag’s Patti Domm, Yun Li and Sarah Min contributed to this market report.