Fed's Powell's continued hawkish message roiled financial markets, sending treasury yields soaring as the Federal Reserve appears set to raise interest rates rapidly in order to curb inflation.
The two-year treasury yield increased by nearly 20 basis points to its highest level since 2019, while the three-year and 10-year yields increased by the most since March 2020, following the Fed chair's statement that the central bank will take "necessary steps" to bring price increases under control. Stocks initially fell after the chairman spoke, but a late-session rally nearly reversed all losses. The treasury market turmoil lowered the rate spread among maturities, indicating that the bond market anticipates the Fed's restrictive policies will tip the economy into recession.
The stock losses raised concerns about whether last week's comeback and decline in volatility would be sustained. European shares, which were higher on Monday, have already recouped all of the losses caused by Russia's invasion of Ukraine about a month ago, as the attraction of lower valuations has enticed investors to return.
Nonetheless, an unprecedented surge in commodity prices due to supply concerns shows little signs of abating, keeping markets on high alert for inflation. The Ukraine conflict and the resulting sanctions against Russia have pushed raw-materials markets into a spiral, with the possibility of shortages of essential commodities such as oil and wheat. On Monday, west Texas intermediate oil soared beyond $110 per barrel after Ukraine refused a Russian proposal to lay down guns and depart Mariupol.
Meanwhile, the bond market remains cautious about the economy. The treasury yield curve is flattening and inverting, which some believe indicates an impending economic recession. The 10-year US Treasury yield has risen to above 2.30%, the highest in almost two years.