Yielding To A More Hawkish Fed

Yesterday, Federal Reserve Chair Powell put the kibosh on high school cafeteria talk. Nervous teenagers put out feelers to avoid disappointment in case their date to the dance rejects them, and apparently so did central bankers when they discussed “thinking about talking about tapering”.Mr. Powell banished the use of the phrase during yesterday’s press conference, and the Fed appeared to make a tentative step towards making a move. The dot plot added the likelihood of an additional interest rate hike – not until at least 18 months from now, mind you – which was enough to convince markets that the Fed was committed to preventing an outbreak of future inflation.

Bond investors took the Fed’s message to heart. The yield curve flattened, with rates rising in the 2 to 5-year range while sinking in the longer term. This reflects concerns that short-term rates are likely to rise in about 2 years, but that those higher rates would be sufficient to quell long-term inflationary expectations. The graphs below illustrate this:

On The Run US Treasury Yield Curve in Top Section: June 17th (green dots), June 10th (orange asterisks), May 17th (green dashed line) with Comparisons in Bottom Section: Today vs 1 week (orange), vs 1 month (green)

(Click on image to enlarge)

On The Run US Treasury Yield Curve in Top Section

Source: Bloomberg

On The Run US Treasury Yield Curve in Top Section: June 17th (green dots), June 15th (orange asterisks), with Comparison in Bottom Section: Today vs 2 days ago

(Click on image to enlarge)

On The Run US Treasury Yield Curve in Top Section June 17, 15

To be fair, it is difficult to see the flattening effect from the curves above. The effects are subtle. The key portions are the bottom sections of the graph, which display comparisons between today's and prior yield curve readings. The biggest moves are in the 30-year bond, which is not surprising because longer yields are more sensitive to changes in price than shorter bonds, and the 5-year note, which would appear to bear the brunt of a rising rate cycle that begins in 2 years or more.

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