U.S. yield curve sends stark warning - consumers can’t handle rate hikes: McGeever

The U.S. bond market rout cranked up a gear last week, amid sticky inflation and firming expectations of a Federal Reserve rate hike, sending yields surging to multi-year highs. This grabbed the headlines, but the more telling story may be the shape of the yield curve.

The signals being sent by the relative moves between short- and longer-dated U.S. borrowing costs suggest bond investors are already looking beyond the inflation-fighting rate hikes likely coming down the pike and bracing for the economic slowdown that could follow.

The gap between two- and 30-year yields shrank on Friday to 71 basis points, the narrowest since late June. Shave off a few more basis points, and this will be the flattest curve since March last year.

The benchmark "2s/10s curve", the gap between two- and 10-year yields, also shrank on Friday. It hit 31 basis points, the tightest spread since July 29. That's a significant marker — it was the day of the Fed's last policy decision and, most notably, Chair Kevin Warsh's poorly received press conference when he offered only an equivocal commitment to the Fed's 2% inflation target. The yield curve steepened the most in a year that day, as investors bet that the Fed would fall further behind the curve and allow inflation to drift even higher.