U.S. Treasury yields fell on bearish trade this week after the U.S. Treasury sold $38 billion worth of 10-year notes, testing demand for debt after yields rose sharply last week. Benchmark 10-year government bond yields hit a near 9-month high after the U.S. Treasury earlier this week raised its borrowing forecast for the next quarter and said it would increase auction sizes across the board. The Bank of Japan also announced last week that it would begin slowly unwinding decades of massive monetary stimulus, fueling long-term concerns about demand from the fast-growing U.S. government debt burden.

July consumer prices gained 3.2% on an annual basis, less than the 3.3% consensus forecast, but showing Fed has less and less basis for further aggressive rate hikes. On a monthly basis, inflation in the U.S. increased 0.2%, in-line with estimates. Still, yesterday’s report unveiled some signs of sticky inflation. Excluding food and energy, the core July CPI reading was up 4.7% on an annual basis, far above the Fed's 2% target. And headline inflation was above the 3% annual rate in June.

This means, unless Fed decides to undertakes some non-conventional move (like, for example, it did during the years of Ben Bernanke being at the whelm of Federal Reserve, when in order to normalize the yield curve, it declared so-called “OperationTwist”), the inverted yield curve may become our “new normal”. Operation Twist is known as a Federal Reserve’s monetary policy initiative used in the past to lower long-term interest rates to further stimulate the U.S. economy when traditional monetary tools were lacking via the timed purchase and sale of U.S. Treasuries of different maturities. The shape of the yield curve came into focus last week, with U.S. and European 10-year yields rising sharply relative to shorter maturities.

The moves have brought the focus back to "steepening of the trade" – the bet that yields on short-dated bonds will fall relative to those on longer-dated bonds. Many investors expect such bets to take off when the central bank appears poised to cut interest rates to boost economic growth. In the meantime though, this looks like a prospect for a distant future, no matter how many new signs of impending recession appear every week.