US | Treasury yields rebound as hard-landing chances drop off the radar

Summary

The market is far from having ruled out the possibility of further rate cuts though. Upcoming jobs and inflation data are likely to favor the view that the economy is expanding at a healthy pace rather than overheating, potentially leading to a modest decline in long-term yields.

Key points

• Key points:
• The Fed is set to proceed with more caution on the pace of rate cuts following its initial big cut, a sentiment echoed by markets, as evidenced by the surge in mid- and long-term yields.
• About ⅔ of the recent increase in nominal yields can be attributed to a parallel 30bp upward shift in the real yield curve; the remainder could be explained by increased inflation compensation.
• The term premium climbed above zero to a 2024-peak, suggesting that the uncertainty around next month’s presidential election is also behind the recent rise in real long-term yields.
• The futures-implied path of the policy rate shows that financial markets now anticipate no more than six 25bp rate cuts (vs roughly eight last month) from this point forward until 2025-end.
• We would expect financial conditions to gradually ease as the Fed cuts rates; market turbulence amid potential post-election economic policy changes is not off the cards.

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