(Bloomberg) -- Treasury two-year yields can go higher even after hitting levels last seen in 2007, according to DoubleLine Capital LP Chief Investment Officer Jeffrey Gundlach.

The bond market is doubling down on the prospect of a US recession after Federal Reserve Chair Jerome Powell warned of a return to large interest rate hikes, prompting the yield on two-year notes to rise to as much as 5.08%. 

Deepest Bond Yield Inversion Since Volcker Suggests Hard Landing

The surge at the front end of the curve comes even as the 10-year rate remained below 4% and the yield on the 30-year bond was even lower. The spread between the 2- and 10-year yields showed a discount of more than a percentage point for the first time since 1981.

Powell said earlier that the Fed was likely to lift rates higher and possibly even faster than previously thought as inflation persisted, even after slowing the pace of hikes just last month.

Powell Softens Tone and Says March Hike Size Is Not Yet Decided

--With assistance from Garfield Reynolds.

©2023 Bloomberg L.P.