Estimated Fed’s Policy Rate Peak Could Deepen Treasury Yield Curve Inversion

On Wednesday, August 10, 2022, the two-year Treasury yield was 48 basis points above the 10-year rate. While it is expected that the Federal Reserve’s funds rate will peak at around 3.5%, from the current range of 2.25% to 2.5%, if the “expected peak rises a half point to 4% with no change in the market’s assessment of the neutral rate of monetary policy, the curve inversion has scope to widen to 85 basis points” according to statements in a report by Meghan Swiber, director of U.S. rates strategy at Bank of America (BOA). Swiber further states in the report that “if the neutral rate rises as well, a half-point increase in the terminal rate might flatten the curve to only 60 basis points.” All eyes remain focused on the yield curve slope, since historically sustained inversions have been followed by economic downturns “over the ensuing 12 to 18 months.”