Ahead, we maintain a bearish stance on long rates despite the calmness post the decision, as a 25bp hike does not materially change the dynamics that have hampered long rates in recent months. Inflation remains high, as does the fiscal deficit, as is wider issuance. And the AI productivity-driven narrative remains in place. The odds see the 10yr yield breaking back above 5% in the days and weeks ahead. If so, the market will begin to settle at above 5%, and ponder the 5.25% to 5.5% range as an area that is perfectly attainable in light of the still quite loud mood music that has been driving long-end yields.
Delivery of the anticipated 25bp hike, by definition, should not have a material effect. The back end initially took the decision very fine, with yields steady in the 4.95% area, although it had shown a mild bias to test lower, as had been the theme through the morning into the decision. What helped here was the price action of previous days that saw the 10yr yield get above 5%, and indeed close above 5%, thus ticking off the need to necessarily have that reaction post this decision. Chair Warsh will be pleased that the breakout of the 10yr yield shows a moderate fall in inflation expectations, which telegraphs a nod of approval from the market to the hike as an inflation containment one. The 10yr real yield is a tad higher as an offset.
Also, the 30yr yield is a tad richer vs SOFR, although not by much. Even though the 30yr yield is still higher than it was before Treasury Secretary Bessent’s buyback announcement, it’s well below the subsequent highs. And it’s clinging on to a 4bp richening versus SOFR compared with the pre-buyback announcement level. At the other end of the curve, the 2yr was a tad spooked by the unanimity shown by the committee on the hike (Chair Warsh voted for the hike too), and the implied priming for another hike from the dot plot. So, the 2yr yield is up 10bp to almost 4.7% post the decision. And the curve is flatter, mostly from the front end, and the 2/10yr Treasury yield curve is back below 30bp. The 5yr is flat on the 2/5/10yr fly though, suggesting that if there are more hikes, it should not be many.
Nothing of note on the plumbing, apart from noting ample bank reserves, suggesting a degree of comfort with balance sheet circumstances. Which is fair. We await the outcome of further deliberations in this space by the end of 2026, with the yet-to-come prescribed action to be taken from 2027.