US | Optimism over a debt ceiling deal eases pressure on the short-end of the yield curve

Summary

Divisions among Fed members before the blackout period are evident: the hawks think the Fed needs to go further, others seem to support a pause to wait until the economic picture becomes clearer, and some others seem to think that the Fed has done enough to bring inflation down.

Key points

• Key points:
• Uncertainty on the debt ceiling resolution explains some of the upward shift in mid- and long-term yields, but was particularly evident on the short-end of the Treasury yield curve.
• 1-month T-Bills rose to 6% last Friday, but fell back to 5.3% this week amid positive news on a bipartisan deal set to be voted tonight by the House of Representatives.
• Markets are no longer expecting the Fed to start a rate cut cycle this year, but are still anticipating a fast easing cycle in 2024, moving closer to our baseline scenario over the last month.
• The leverage component of the National Financial Conditions Index (NFCI) is one of the few measures that are signaling that the financial system is currently more vulnerable to stress amid an environment of high interest rates.
• The median forecaster surveyed by the Philadelphia Fed revised slightly down its 10-year Treasury yield projections and expects it to hover just above 3.5% over the next year, broadly in line with our baseline scenario.

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