(Repeats story of March 7) (Updates with Powell testimony; adds quote, market activity)
By David Randall and Davide Barbuscia
NEW YORK, March 7(Reuters) -
Hawkish
comments
by Federal Reserve Chairman Jerome Powell helped push a closely watched part of the U.S. Treasury yield curve to its deepest inversion since 1981 on Tuesday, once again putting a spotlight on what many investors consider a time-honored recession signal.
The U.S. central bank has hiked interest rates aggressively over the last year to fight inflation that hovered around 40-year highs and bring it down to its 2% target rate.
An inverted yield curve occurs when yields on shorter-dated Treasuries rise above those for longer-term ones. It suggests that while investors expect interest rates to rise in the near term, they believe that higher borrowing costs will eventually hurt the economy, forcing the Fed to later ease monetary policy.
The phenomenon is closely watched by investors as it has preceded past recessions.
The yield curve inverted further on Tuesday after Powell told Congress the Fed would need to raise rates higher than previously anticipated in response to recent data showing that growth and inflation remain strong despite a barrage of rate increases over the past year.
Shorter-dated yields soared, with the rate on the two-year note closing at a new high since mid-2007 at 5.015%. Yields on the 10-year Treasury notes, meanwhile, fell 1.5 basis points to 3.968%.
Here is a quick primer on what an inverted yield curve means, how it has predicted recession, and what it might be signaling now.
WHAT SHOULD THE CURVE LOOK LIKE?
The yield curve, which plots the return on all Treasury securities, typically slopes upward as the payout increases with the duration. Yields move inversely to prices.
A steepening curve typically signals expectations for stronger economic activity, higher inflation, and higher interest rates. A flattening curve can mean investors expect near-term rate hikes and are pessimistic about economic growth further ahead.
HOW DOES THE CURVE LOOK NOW?
Investors watch parts of the yield curve as recession indicators, primarily the spread between three-month Treasury bills and 10-year notes, and the two- to 10-year (2/10) segment.
Yields on two-year Treasuries have been above those of 10-year Treasuries since July.
That inversion reached negative 103.1 basis points on Tuesday as shorter term yields soared, the largest gap between shorter-dated and longer-term yields since September 1981. At that time, the economy was in the early months of a recession that would last until November 1982, becoming what was then the worst economic decline since the Great Depression.