(Reuters) - Sharp moves in the U.S. Treasury market are increasingly pointing to the risk of an approaching recession, with "bond vigilantes coming out of the woodwork" and markets doubting the U.S. Federal Reserve's plan to engineer a "soft landing" for the economy as it hikes interest rates to fight inflation, market experts said.
Fed Chair Jerome Powell said on Monday the U.S. central bank must move "expeditiously" to bring too-high inflation to heel and that it could use bigger-than-usual interest rate hikes if needed. Bond yields, which move inversely to prices, spiked while the U.S. Treasury yield curve continued its flattening trend.
"The market seems to be challenging the soft-landing view for the U.S. economy that the Fed argued at the March FOMC meeting", BofA strategists said.
The U.S. Treasury yield curve reflects "recession risks, and not just through the curve's extreme flatness at the inception of the Fed tightening cycle," the strategists said.
The closely followed part of the yield curve measured between 10-year and two-year Treasuries has narrowed by about 60 basis points since the start of the year, with the longer-dated notes now yielding less than 20 basis points more than two-year debt.
Any inversion of that part of the curve, when shorter notes yield more than longer ones, is generally seen as presaging a recession by six to 24 months.
"The yield curve does look ominous," wrote Christopher Murphy, Co-Head of Derivatives Strategy at Susquehanna Financial Group, although he said an inversion does not always guarantee a recession.
Melissa Brown, Global Head of Applied Research at Qontigo, said the yield curve is reflecting a shift in market views on the ability of the Fed to tighten monetary policy just enough to reduce inflation without throwing the economy into a recession.
"The market perhaps is assuming that they can't thread that needle ... it's going to be tough to not drive us into recession", she said.
By Davide Barbuscia
