US | Policy uncertainty and rising term premia are keeping Treasury yields elevated

Summary

While Trump recently suggested he would not try to remove Powell from his position following last week’s intensified criticism, such threats to institutions underpinning the dollar’s global dominance pose a serious risk to the future of the global financial system.

Key points

• Key points:
• The initial flight to safety that led to a drop in the 10-year Treasury yield to 3.86% on April 3 was followed by a subsequent bond sell-off that caused yields to rebound sharply.
• The increased compensation demanded by investors has prevented Treasury yields from declining in tandem with market-based inflation expectations and market-implied rate paths.
• As long as there are no clear signs of a sharp slowdown in economic activity, the Fed will likely have room to maintain its current policy stance at the June meeting as well.
• Mortgage rates edged higher, driven by rising Treasury yields, and corporate bond spreads, though still near historical lows, widened amid a worsening business outlook.
• Some broad financial stress indicators have shown mild upticks, reflecting growing uncertainty and sensitivity to geopolitical and policy shocks.

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