(Bloomberg) - If history is any guide the surge in US two-year yields back above the fed funds upper boundary this week is an ominous sign for any investors looking for the Federal Reserve to cut rates in 2023.
Even with the recent string of strong US economic data investors are still pricing in a 52% probability of the Fed reducing rates by a quarter point before year-end. However, since 1990 Fed rate cuts have only come after two-year yields fell below the rates upper boundary and remained there for at least several months.
Following its most recent policy tightening cycle that ended in 2018, the Fed started to reduce rates about four months after two-year yields decisively fell below the rates upper boundary. In 2007 the gap was even longer, with the central bank cutting rates 15 months after two-year yields dropped below the benchmark rate and stayed there, while in 2001 it was after six months.
The two-year Treasury note’s yield broke above 5% this week, the highest level since July 2007, as traders anticipate additional Fed rate increases. That puts the yield above the Fed’s upper boundary of 4.75%.
By David Finnerty
