Yield Curve Inversion Trade Seen Roaring Back After FOMC Minutes

Wednesday’s release of minutes from the Federal Open Market Committee’s January meeting has the potential to send one of the most widely followed parts of the Treasury yield curve hurtling toward inversion within a matter of weeks.

That’s the view of BMO strategist Jon Hill, who says that the gap between 2-and 10-year notes — which bottomed out at 9.1 basis points in December and currently stands at about 14.4 basis points — could resume its narrowing trend should the minutes tilt either of two ways.

The Federal Reserve signals that another interest-rate increase may be on the horizon even without clear signs of longer-run U.S. economic improvement, or if policy makers saw the risks of a recession as greater than they’ve let on while reaffirming a preference for keeping the fed funds target rate unchanged.

“The January minutes could lay the groundwork for a possible 2s10s inversion several weeks out,” Hill said Tuesday. “Entering into such positions looks increasingly attractive.”