US | Treasury yields resumed their bearish trend after Powell’s tough talk on inflation

Persistent core inflation coupled with a resilient economy give the Fed “flexibility to be aggressive” against inflation. Another supersized rate increase (75 bps) is coming next week: the Fed will continue to front load rate hikes to add 150bp of tightening by December before shifting to a relatively long pause thereafter.

Key points

• Key points:
• Treasury yields fell significantly from mid-July to mid-August, temporarily depressing the middle- and long-end of the yield curve. Powell reversed this rally with a hawkish speech at Jackson Hole.
• Coming fed funds rate hikes will most likely invert the 3m10y slope, but given that the hiking cycle will likely end in Dec, we anticipate that the inversion won't be much more pronounced than historical standards.
• FOMC members have been vocal on the likely need to keep rates “moderately restrictive” over 2023, but futures markets are still pricing in that rate cuts could come as soon as next year.
• Overall, our assessment is that the Treasury market is signaling continued confidence in a scenario in which the Fed wins the battle against inflation, and an acknowledgement that some pain now is better than far greater pain later.

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