Treasury yields hit the highest level in more than a decade and a half after Congress passed legislation to prevent the government from shutting down for at least another 45 days.
Benchmark 10-year Treasury yields briefly surpassed 4.7% on Monday, surpassing the 15-year high they notched last week. Meanwhile, the benchmark two-year Treasury yield was at 5.102%.
The yields are inverted and have been for a while — meaning that the shorter-term yields are higher than longer-term yields. Yield curve inversions can foreshadow recessions as they suggest investors have little faith in growth picking up in the coming years.
With uncertainty surrounding a government shutdown now out of the way — at least for the time being — all eyes are on the Federal Reserve and whether it will raise interest rates again this year or decide that its at-times-aggressive tightening cycle has come to a close.
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Even the perception that the Fed’s interest rate target might move higher is enough to push up Treasuries. Higher interest rates mean there is a greater chance of an economic slowdown or even a full-blown recession in the economy’s future.
There are mixed signals about whether another Fed rate hike is in store. The labor market remains resilient, meaning that the Fed might have more wiggle room to hike, although there have been a few signs recently that the labor market is softening.
But recent inflation reports have fueled a bit of concern that inflation is proving stickier than expected.
Inflation ticked up a tenth of a percentage point to 3.5% for the year ending in August, as measured by the personal consumption expenditures price index, the gauge favored by the central bank.
While the PCE index is the Fed’s preferred gauge, the more commonly cited headline number is the consumer price index. Inflation was clocking in at 3.7% in August, according to the CPI.
Both of those readings are still uncomfortably higher than the 2% price growth that Fed Chairman Jerome Powell and other Fed officials are targeting.
Investors are very split on whether they think rates will move higher before the end of the year.
Investors see about a 55% probability that the Fed will not hike rates again before the end of the year, according to the CME Group’s FedWatch tool, which calculates the probability using futures contract prices for rates in the short-term market targeted by the Fed.
The place 39% chance on the possibility that the Fed’s target rate will go a quarter of a percentage point higher, and 6% on the Fed conducting two more interest rate hikes before the start of 2024.
Famed investor Bill Ackman, founder and CEO of Pershing Square Capital Management, predicted on Monday that interest rates are at their terminal level and cited sky-high mortgage rates and high credit card rates as factors that will slow the economy.
“[T]he Fed is probably done. I think the economy is starting to slow,” Ackman said on CNBC. “The level of real interest rates is high enough to slow things down.”
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Still, there are other signs that economic growth is still chugging right along. Monday’s ISM manufacturing index report, which gauges business conditions at U.S. factories, showed some improvement, rising to 49% last month from 47.8% the month before.
“For Fed officials trying to hold back economic demand to fight inflation, today’s survey data show manufacturing is not slowing down, orders and especially factory production are picking up sharply,” said Chris Rupkey, chief economist at FWDBONDS. “We never thought the economy could adjust to interest rates above 5%, but today’s purchasing managers report is hinting that this may indeed be the case.”