The spread between two- and ten-year Treasury yields went even more deeply negative on Wednesday after data on China’s expanding manufacturing activity stoked further worries about the need for higher interest rates. The 2s10s spread, the difference between the yields of two- and ten-year Treasury notes, was minus 88 basis points in New York morning trading, and on its way to its most negative reading since October 1981. The spread also briefly touched minus 97.7 basis points, according to FactSet data.
The spread between two- and ten-year Treasury yields is a closely watched barometer of the market’s expectations for interest rate movements. When the spread goes negative, it means that investors expect short-term interest rates to be higher than long-term rates in the future. A negative spread is often seen as a sign of an impending recession, as investors become increasingly wary of the economic outlook and seek safety in longer-term investments.
The 2s10s spread has been in negative territory since May 2019, when it first dipped below zero. It has since been hovering around the minus 75 basis points mark, with occasional spikes. The most recent spike occurred on Wednesday, when the spread went even more deeply negative.
The cause of the spike was data on China’s expanding manufacturing activity. The data showed that China’s manufacturing sector expanded at its fastest pace in nearly three years in April, indicating that the Chinese economy is recovering from the coronavirus pandemic. This news sparked concerns that the U.S. Federal Reserve will be forced to raise interest rates in order to keep inflation in check.
The Federal Reserve has kept interest rates at near-zero levels since the start of the pandemic in order to support the economy. Any move by the Fed to raise interest rates would be seen as a sign that the economy is improving, but it could also lead to a sell-off in the stock market and a tightening of financial conditions.
The negative 2s10s spread is a sign that investors are expecting higher interest rates in the future. This could lead to a sell-off in the stock market as investors shift their money out of equities and into bonds. It could also lead to a tightening of financial conditions, as higher interest rates make it more expensive for borrowers to take out loans.
The negative 2s10s spread is a sign that investors are increasingly wary of the economic outlook. It is a sign that the market is expecting higher interest rates in the future, and that investors are becoming more risk-averse. The spread could remain negative for some time, as investors remain cautious about the economic outlook and seek safety in longer-term investments. The spread could also spike again if there are further signs of economic improvement, or if the Fed decides to raise interest rates.