US | Treasury yields likely to increase further

Summary

They will peak once the Fed is done tightening. Slowing demand to bring down inflation without significant pain is “not getting any easier”, but markets (still?) price in a soft landing.

Key points

• Key points:
• With the Fed set to hike rates to a “modestly restrictive level” by year-end, the tightening pace is already faster than the one seen in the 1994-95 hiking cycle.
• With a flat yield curve ahead, we expect both 2- and 10-year yields to keep moving in sync, while shorter-term Treasury yields continue to catch up, driven by upcoming Fed hikes.
• Uncertainty around inflation has made Fed's forward guidance somewhat less reliable, which is reflected in recent episodes of higher volatility in the Treasury market.
• Market-based inflation expectations point to continued confidence that, over the longer term, the Fed will be able to bring down inflation to the 2.0% target.
• The June Summary of Economic Projections (SEP) signaled a much steeper path of rate hikes and more consensus among FOMC participants on the need to take the fed funds rate to a restrictive level.

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