The two-year Treasury yield jumped above 2 per cent, marking a rebound to a key psychological level last seen just as the U.S. sank into the depths of the financial crisis in September 2008.
The past 14 months have witnessed a remarkable reversal for the coupon maturity that's most sensitive to Federal Reserve expectations. After failing to eclipse 1 per cent through much of 2016, the yield surged following President Donald Trump's election victory, and kept climbing throughout 2017 as policy makers delivered on their promised three rate increases.
Data Friday showing that the underlying pace of U.S. inflation accelerated last month finally drove it above 2 per cent, as the market-implied probability of a Fed rate increase in March exceeded 80 percent. Treasuries fell broadly, with the difference between yields on five- and 30-year maturities approaching the smallest since 2007.
The latest inflation reading "has left the market pricing in higher odds of a March rate hike and the odds of more rate hikes in 2018 have increased as well," said Gennadiy Goldberg, a strategist at TD Securities in New York. "We're seeing the market move toward the Fed so we should see more curve flattening and more pressure on the front-end."
The last time investors saw two-year Treasuries yielding 2 per cent was Sept. 30, 2008, about two weeks after the collapse of Lehman Brothers Holdings Inc., which sparked a global flight to safety. On Sept. 15, the day of the bankruptcy filing, the yield plunged 50 basis points, driving it below 2 per cent on an intraday basis.
After a turbulent stretch where the Treasury and the Fed tried to bolster confidence in the financial system, the yield closed below 2 per cent at the end of September 2008 and remained below that mark until today. In September 2011, it set a record low of 0.143 per cent, with the Fed's benchmark rate locked near zero.
Now, in a development that may have seemed unthinkable during much of the economic recovery, the two-year note provides investors with more income than dividends on the S&P 500 Index.
Just 18 months ago, investors grappled with the prospect of an unprecedented drop in 30-year yields below 2 per cent. While that didn't happen, the yield spread between long- and short-maturity Treasuries has continued to shrink, flattening the yield curve.
Bond traders are betting the Fed will gradually raise rates in 2018, meaning the two-year yield may have more room to climb. At the same time, any sign that policy makers will pause could halt the momentum that's sent the yield higher for six consecutive quarters, the longest stretch since 2000.