US | Long-term yields join the Fed in its fight against inflation

The additional tightening of financial conditions resulting from the recent increase in long-term Treasury yields reinforces our view that the federal funds rate has peaked at its current 5.25-5.50% target range.

Key points

• Key points:
• The 2-year Treasury yield continued to price in no further policy rate hikes, but the 10-year yield spiked and is now near levels not seen since the pre-global-financial-crisis tightening cycle.
• Although certain red flags like both the 10y-2y and 10y-3m Treasury yield spreads appear to be fading, it is too early to conclude that they failed to anticipate an economic recession.
• Long-term yields' sharp upward movement was first driven by expectations of a higher-for-longer fed funds rate and more recently by a higher term-premium.
• Stronger-than-expected economic resilience continued to support the fed funds market’s higher expected trajectory for the policy rate at longer horizons.
• Financial conditions indexes remain relatively stable, but households and businesses will eventually face growing interest costs as maturing debt is refinanced at higher rates.

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