one of the bond market’s most reliable gauges of impending us recessions plunged further below zero into tripledigit negative territory on tuesday after federal reserve chairman jerome powell pointed to the need for higher interest rates and a possible reacceleration in the pace of hikes  the widely followed spread between 2 and 10year treasury yields plunged to minus 1046 basis points during new york afternoon trading and headed for a level not seen since sept 22 1981 when it reached minus 1214 basis points and the fed funds rate was 19 under then federal reserve chairman paul volcker  powell surprised financial markets on tuesday in more hawkish comments than many expected which sent the policysensitive 2year rate above 5 all three major stock indexes djia spx comp down and the ice us dollar index up by almost 12 to its highest level since january meanwhile traders boosted the odds of a halfofapercentage point rate hike on march 22 to 705 from 314 a day ago and saw a growing chance that the fed funds rate will end the year between 55 and 575 or higher according to the cme fedwatch tool  “every time the fed gets more hawkish the curve gets more inverted which is the market’s way of saying there will be fed rate cuts later because of a slowdown in growth andor a recession” said tom graff head of investments for facet in baltimore which manages more than 1 billion “it tells you what the market thinks about the sustainability of keeping rates this high for a long time and the market still thinks a recession is pretty likely but not necessarily imminent”  an inverted 2s10s spread simply means that the policysensitive 2year rate tmubmusd02y is trading far above the benchmark 10year yield tmubmusd10y  as traders and investors factor in higher interest rates in the near term and some combination of slower economic growth lower inflation and possible interestrate cuts over the longer term tuesday’s tripledigit inversion was largely driven by the rise in the 2year rate which was on its way to ending the new york session above 5 for the first time since aug 14 2006   the 2s10s spread first went below zero last april only to uninvert again for a few months before dropping further into negative territory since june and july it is just one of more than 40 treasurymarket spreads that were below zero as of monday but is regarded as one of the few with a reasonably reliable track record of predicting recessions albeit with a oneyear lag on average and at least one false signal in the past   via phone graff said that “i don’t think the power of yieldcurve inversion as a signal has changed at all every slowdown and every cycle is a little different so how it plays out is a little different but that signal is just as powerful and accurate as ever i think the economy is going to slow meaningfully in the second half of this year but not fall into recession until 2024” meanwhile facet has been overweight on healthcare and established technology companies with higher profit margins lower debt levels and less variability in their earnings than in the past he said  as a result of powell’s testimony the 1year tbill rate jumped by more than any other rate to 526 while the 6month tbill rate went to 522 on tuesday the fed chairman’s focus on the need for higher rates came as lawmakers repeatedly asked him whether interest rates are the only tool available to policy makers for controlling inflation powell replied that interest rates are the main tool demurring from an opportunity to discuss the fed’s quantitative tightening process or shrinking of the central bank’s 834 trillion balance sheet in more detail  qt was once seen as a supplement to rate hikes with one economist at the fed’s atlanta branch estimating that a 22 trillion passive rolloff of nominal treasury securities over three years would be equivalent to a 74 basis point rate hike during turbulent times   but tinkering with qt now and accelerating the pace of that process would be a “can of worms the fed doesn’t really want to open “said marios hadjikyriaco senior investment analyst at cyprusbased multiasset brokerage xm that would “drain excess liquidity out of the system and tighten financial conditions faster helping to transmit the stance of monetary more effectively but the scars of the ‘taper tantrum’ and the 2019 repo crisis have made fed officials wary of deploying this tool in an active manner” according to facet’s graff last year’s bondmarket crisis in england when a surprising large package of tax cuts from the uk government triggered tumult and led to an emergency intervention by the bank of england is also playing a factor in the fed’s thinking “if the fed got too aggressive with qt it might have unpredictable outcomes” graff said “and given that the fed hasn’t said anything about it the market has kind of forgotten about quantitative tightening as a tool honestly right or wrong”