T-Yields soaring ahead of FOMC’s rate decision

Short-dated Treasury yields soared on Friday while the dollar rose as investors bet on US interest rate hike next week and grew alarmed at signs of a global economic slowdown.

The two-year U.S. Treasury yield, a bellwether for interest rate expectations, topped 3.9%. Coupled with a decline in the benchmark 10-year note, the yield curve inversion between the two notes – seen as a recession harbinger – widened further. The two-year’s yield rose 1.5 basis points to 3.888% and the 10-year yield slid 3.9 basis points to 3.420%.

Traders were pricing in a 75% chance of a 75-basis-point (bps) rate hike and a 25% chance of 100 bps when the Fed meets next Wednesday. The Bank of Japan and Bank of England also meet next week.

The gap between the two, which has inverted because the short end is higher than the long end, widened to -47.4 basis points.