US | Long-term yields remain relatively low as financial conditions eased slightly

Summary

Signs that inflation is stabilizing and rising recession risks add to the market view that the policy stance could reverse sooner. More hikes are coming, as the Fed is still looking to take rates to a moderately restrictive level to bring inflation back down; however, the tightening pace will likely slow going forward.

Key points

• Key points:
• The 2-year yield hovered around 3% as markets assess the end of the cycle, while longer-term yields dipped, likely driven by an expectation that the policy stance will reverse sooner.
• The recent 75bp fed funds rate hikes drove the 3m10y yield spread to near zero at an unprecedented speed and will likely become negative in the following weeks.
• More economic data due next month will help confirm whether the Fed is cooling demand, and will give more clarity about the next hike; today odds are roughly 1 to 1 between 50 or 75 bps.
• Overall, broad financial conditions and stress indices loosened slightly in the last weeks. The Fed will prefer to see tighter financial conditions for inflation to fall steadily.
• Professional forecasters revised up their short-term interest rate projections. With no significant revisions to the 10-year Treasury yield forecasts, the 3m10y Treasury yield spread is now expected to remain near zero from today and throughout 2023.

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