US yield curve inverts by most in 40 years

The US Treasury yield curve inverted further during the week. While the 10-year yield treaded water (+1bp at 3.83%), the 2-year yield gained 20 basis points from 4.33% to 4.53% in the wake of James Bullard’s comments. He said that the Fed’s terminal policy rate should reach a minimum level of 5% and leaves the door open to go as high as 7% if need be. This is a level much higher than current market pricing and unofficial Fed forecasts indicate. 

The 10Y-2Y spread reached new extremes (-70bps), touching a level not seen since the early 1980s. An inverted Treasury yield curve almost always heralds recession.

The broad municipal bond index advanced meaningfully through most of the week (S&P Municipal Bond index up 1.75%), outperforming US Treasuries by a wide margin. The IVOL ETF that invests in a mix of US Treasury securities and long options tied to the shape of the yield curve was down 1.86%.

In Europe, the yield on the German 10-Year Bund fell to 2% (down 15 basis points), well below a decade-high of 2.42% hit on October 21st.

Investment grade corporate bond prices were up 0.72% in Europe (IBOXX € Liquid Corporates index down 12.33% YTD) and up 1.16% in the U.S. (IBOXX Ishares $ Investment Grade Corporate Bond Index down 17.82% YTD).

High-yield bonds edged down 0.12% in Europe (IBOXX € Liquid High Yield Index down 10.03% YTD) while they gained 0.35% in the U.S. (Markit iBoxx USD Liquid High Yield Capped Index down 8.98% YTD).

Emerging debt in local currencies was flat (up 0.05% for the week, down 17.79% YTD).