SUPERNEWS

Macro

Yields Spike, Inflation Fears as Fed Reassesses Policy

Persistent inflation and structural shifts push US 10-year yields up, with core PCE at 2.8%-2.9%, signaling long-term rate recalibration.

By Barry Stearns

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5/2, 00:03 EDT
S&P 500
iShares 20+ Year Treasury Bond ETF
iShares 7-10 Year Treasury Bond ETF
McDonald's Corporation
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Key Takeaway

  • US 10-year yields surged last month, signaling investor belief in persistent inflation and questioning the Fed's policy effectiveness.
  • Inflation concerns are heightened by structural economic shifts, with bond yields expected to rise as market equilibrium adjusts.
  • Active Treasury investors' short positions may not be sufficient if inflation remains high, indicating potential adjustments in bond strategies.

Persistent Inflation Concerns

Inflation is proving to be more stubborn than anticipated, with recent data indicating a structural shift in the economy that could keep prices elevated. US 10-year yields saw a significant increase last month, the most since September 2022, signaling investor concerns over inflation. The Federal Reserve's acknowledgment of persistent inflation as a top financial risk, coupled with their recalibration of policy, underscores the seriousness of the situation. Core PCE, the Fed's preferred inflation measure, has hovered between 2.8% to 2.9% in recent months, suggesting that inflationary pressures are not abating as hoped.

Market Reactions and Predictions

Investors are starting to adjust their expectations, with many now believing that inflation could settle in the 2.5% to 3% range permanently. This adjustment is due to several factors, including global population growth, rising standards of living in emerging countries, and American wage growth outpacing the Fed's inflation target. These shifts necessitate a recalibration of bond yields to higher levels. The labor market's dynamics, with demand outstripping supply and wages for job switchers accelerating, further complicate the inflation outlook.

Signals from Consumer Demand

There are mixed signals regarding consumer demand, with companies like McDonald’s and Starbucks indicating potential slowdowns. If consumer demand continues to weaken, it could help cool inflation and allow bond yields to decrease. However, the structural factors driving inflation, such as labor market tightness and wage growth, suggest that any relief might be temporary. The recent short-covering in 5-year Treasuries and the potential surge in SOFR shorts reflect market participants' expectations for higher-for-longer rates.