Key moves are being seen on both ends of the curve through Monday, as the market continued to digest Chair Warsh’s words from Friday. On the front end, the probability of a 25bp hike from the September FOMC meeting has flipped from 50:50 to 3:1 in favour. That’s meaningful. Not quite fully discounted. But absolutely heading in that direction. On the back end, the 10yr break-even inflation rate continued to ease lower. Only by a few basis points. But it’s the kind of move that should please Chair Warsh, as it suggests that his hawkish words have acted to contain inflation expectations, even if they weren’t high to begin with (still in the 2.3% area).<\/p>\n
However, the 10yr yield continued to edge higher, just as it did on Friday afternoon. The culprit is ongoing upward pressure on real yields, a theme we’ve opined on now for many months. Higher real yields suggest that the pressure being felt in long rates is not from inflation. It’s from a combination of issuance pressure (current and anticipated), and it likely incorporates a positive productivity growth slant coming from the AI revolution. Chair Warsh specifically referenced a positive secular growth dynamic up for discussion at the opening of the G20 summit in South Carolina. That gels with higher real rates.<\/p>\n
The optics of seeing Treasury Secretary Bessent deplaneing with Fed Chair Warsh from Air Force Two were interesting. Not indicative of anything specific, apart from a reminder that both of these men have their attention squarely on the front end and back end of the yield curve. Chair Warsh effectively warned us on Friday that front-end rates may need to be adjusted higher. A week or so earlier, Treasury Secretary Bessent moved to contain long-end yields through an intention to more than double the volume of long-end buybacks. He went on to assert on Monday that he was not targeting any particular level; rather, he was just prodding the market towards a fairer valuation, from his perspective.<\/p>\n
Ahead, the front end is liable to remain sticky now at elevated yields unless negated by a weak payrolls report on Friday. But back-end yields remain under rising pressure. We continue to anticipate a move in the 10yr yield into the 4.75% to 5% area as the real-rate elevation pressure remains. Note that Treasury Secretary Bessent can still claim a victory lap, given the tightening seen in long-tenor swap spreads, vis a vis relative richening in long-end Treasuries. As a percent of total spreads, these are in some 10% since the buyback announcement, and looking reasonably resilient to the downside. Overall, the curve should steepen from the back end.<\/p>\n","protected":false},"excerpt":{"rendered":"Key moves are being seen on both ends of the curve through Monday, as the market continued to…\n","protected":false},"author":2,"featured_media":610586,"comment_status":"","ping_status":"","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[11],"tags":[72,113,61,60],"class_list":["post-610585","post","type-post","status-publish","format-standard","has-post-thumbnail","category-economy","tag-business","tag-economy","tag-ie","tag-ireland"],"_links":{"self":[{"href":"https:\/\/www.newsbeep.com\/ie\/wp-json\/wp\/v2\/posts\/610585","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.newsbeep.com\/ie\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.newsbeep.com\/ie\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.newsbeep.com\/ie\/wp-json\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/www.newsbeep.com\/ie\/wp-json\/wp\/v2\/comments?post=610585"}],"version-history":[{"count":0,"href":"https:\/\/www.newsbeep.com\/ie\/wp-json\/wp\/v2\/posts\/610585\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.newsbeep.com\/ie\/wp-json\/wp\/v2\/media\/610586"}],"wp:attachment":[{"href":"https:\/\/www.newsbeep.com\/ie\/wp-json\/wp\/v2\/media?parent=610585"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.newsbeep.com\/ie\/wp-json\/wp\/v2\/categories?post=610585"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.newsbeep.com\/ie\/wp-json\/wp\/v2\/tags?post=610585"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}