A Changing Fed Faces Sticky Inflation and Cracks in Consumer Strength
Yields may rise as inflation and geopolitical tensions persist, despite any short-term relief
Treasury yields are poised for steepening once the US-Israel conflict with Iran concludes, but near-term vulnerabilities remain as inflation risks persist. The ongoing geopolitical tensions have led to increased oil prices, impacting inflation expectations and Federal Reserve rate cut forecasts.
As the situation unfolds, markets are currently pricing in modest rate hikes, with expectations for the funds rate to fall to 3%-3.25% by next year. However, any post-war relief may only provide temporary support for the 10-year yield, as structural pressures and rising debt continue to elevate term premiums.
Foreign demand for Treasuries is waning, with significant reductions in holdings from key investors like China. This trend, coupled with potential supply increases from the Federal Reserve’s balance sheet adjustments, suggests that upward pressure on yields may persist.
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