A just-published report updated our outlook for the U.S. Treasury market and Fed policy in the near run and on a 6-12 month basis. While the Fed is still intent on lowering its policy rate, we anticipate that economic and inflation trends will force still aggressive rate-cutting expectations to steadily unwind.
The expected march to a 3% or lower fed funds rate hit a hard bump with last month’s U.S. payroll report. Moreover, last week’s CPI report also showed a high-side miss. The consensus view held by both bond investors and the Fed is far too optimistic on the prospects for a return to a low inflation world, and thus will be repeatedly blind-sided by economic resilience and sticky underlying inflation.
As our research has highlighted, Fed policy never entered restrictive territory, and now is retreating. The easing in financial conditions, along with the ongoing strength in corporate profits, will sustain the risk-on phase. For bond investors, conditions will steadily deteriorate, and we expect higher Treasury yields over the course of the next year.