US two-year Treasury yields rose above 10-year borrowing costs on Monday - the so-called curve inversion that often heralds economic recession - on expectations interest rates may rise faster and further than anticipated.

Fears the US Federal Reserve could opt for an even larger rate hike than anticipated this week to contain inflation sent two-year yields to their highest levels since 2007.

But a view is also playing out that aggressive rate hikes may tip the economy into recession.

The gap between two and 10-year Treasury yields fell to as low as minus 2 basis points (bps), before rising back to around five bps, Tradeweb prices showed.

The curve had inverted two months ago for the first time since 2019 before normalising.

An inversion of this part of the yield curve is viewed by many analysts as a reliable signal that recession could come in the next year or two.

The move follows inversions on Friday in the three-year/10-year and five-year/30-year portions of the Treasury curve, after data showed US inflation continued to accelerate in May .

Two-year Treasury yields rose to a 15-year high around 3.25% before easing to 3.19%, while 10-year yields touched the same level, the highest since 2018.

Friday's data showed the largest annual US inflation increase in over 40 years, dashing hopes the Federal Reserve might pause its interest rate hike campaign in September. Many reckon the central bank may actually need to up the pace of tightening.

Barclays analysts said they now expected a 75 bps move from the Fed on Wednesday rather than the 50 bps which has been baked in.

Money markets are now pricing a cumulative 175 bps in hikes by September and also see a 20 percent chance of a 75 bps move this week, which if implemented would be the biggest single-meeting hike since 1994. (Reuters)