Will 10-year yields find its way back above 1.50% post-FOMC?
Or are we settling into a new range for the bond market below 1.50% and its 100-day moving average (red line) even as inflation expectations are still elevated.
A key question that the market needs to answer isn't so much so if they believe whether inflation is coming (that has arguably been telegraphed already in Q1) but now is whether or not they believe such price pressures are going to be persistent.
And in turn, will that start to nudge the Fed into any policy changes before the year-end?
There is some expectation that supply chain disruptions will keep persisting in 2H 2021 and that will "artificially" boost inflation in the months ahead.
The Fed is trying to ignore that and mark it down as a "transitory" factor but how long exactly is this "transitory" period we are talking about? Nobody knows for sure.
But the more this stays and the more that consumers believe that inflation is going to be sticky and persistent i.e. high inflation expectations, then that will keep the pressure on the Fed to perhaps act sooner rather than later.
For this week though, they're still not in any rush. There is some hope that they will set up a pivot for August or September but Powell & co. may yet knock that down should they so choose to in the weeks ahead.
Going back to yields, Fed taper expectations is the key driver at the moment as the recent decline shows that even inflation expectations can't cut it anymore.
