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Bond Yields Tell Their Own Story

Diverging bond rates

Where as the fed is telling a story of easing inflation and easing interest rate hikes, bond market appears to believe something else.

Fed officials have delivered a clear message in recent weeks: They intend to slow down the speed of interest rate increases, but envision eventually raising them higher, and keeping them high for longer.

  • But the bond market isn’t completely buying that story.

Why it matters: Futures markets imply that the Fed will be cutting interest rates starting next year — much sooner than the central bank’s leaders envision.

  • If the market pricing proves accurate, an economic slump will bring down inflation, and the Fed will react by partly reversing recent rate increases. If Fed officials are right, they will keep tightening the screws on the economy to try to vanquish inflation.
  • Essentially, it is a tug-of-war over what the economy will look like for the remainder of the 2020s: Something resembling the bursting-at-the-seams, inflationary economy of the last 18 months, or a return to the low-inflation, low-rate norm of the 2010s.

State of play: As recently as July, 10-year Treasury bonds yielded more than 2-year equivalents, as is normal. Since then, that spread has reversed, creating the widest yield curve inversion since the early 1980s.

  • As of this morning, 2-year Treasuries yielded 4.38%, reflecting expectations of continued near-term rate hikes, while 1o-year Treasuries yielded 3.58%, implying that the current rate-hiking campaign will be followed by years of cheaper money.
  • Futures market prices imply that the central bank will be cutting rates by the fall of 2023, according to a tracker maintained by the Atlanta Fed.
Axios Macro By Neil Irwin and Courtenay Brown · Dec 06, 2022