Bond yields are falling, inversion of the key yield curve is narrowing as investors consider the Fed’s next move

A key reversal of the government yield curve narrowed on Friday after hitting its steepest level since 2000 the day before.

Inversions of yield curves, or when shorter government bonds have higher yields than longer ones, are often seen by the markets as a sign that a recession is on the way.

But the gap between 2-year and 10-year interest rates fell on Friday as traders weighed the possibility that the US Federal Reserve will raise interest rates by 75 basis points at its next meeting, not 100 basis points.

The 2-year interest rate, which is more sensitive to changes in monetary policy, recently fell by almost 4 basis points to 3.11%. The yield on the leading 10-year government bond fell 4 basis points to 2.919%. The dividend moves in reverse to prices, and a basis point is equal to 0.01%.

Federal Reserve Governor Christopher Waller said Thursday that he supports a 75 basis point increase at the central bank’s next meeting scheduled for the 26th-27th. July. However, he said he would see the data and is open to a major move if he thinks it is necessary.

This comes after a rising number of analysts said an increase of 100 basis points could be on the table after inflation continued to rise more than expected.

Investors underwent a new round of bank earnings after disappointing results on Thursday from JPMorgan Chase and Morgan Stanley. Wells Fargo delivered mixed results while Citigroup showed up after beating profit expectations.

On the economic front, retail sales in June, which were better than expected, showed a resilient consumer to rising inflation.

– CNBC’s Sarah Min and Jeff Cox contributed to this report.

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