Some interesting points from ING about 10-year yields, and the risks they see that could take us back to 5%.
- Unlike previous cycles where the 10-year yield typically decreased after the Fed's rate peak, in the current cycle, the yield has actually increased, hitting a cycle high of 5% in October 2023, three months after the presumed rate peak
- Contrary to expectations following a "Fed peak moment," market rates have not decreased significantly. This is attributed to strong labor market data and intermittent increases in inflation.
- Historically, market rates tend to increase temporarily when the Fed makes its first rate cut, as market participants sell on the fact. However, as the Fed continues to cut rates, the 10-year yield eventually decreases and finds a new bottom.
ING chart of past and present cycle (US10Y)
- The current cycle has not seen the typical initial decrease in the 10-year yield following the Fed's rate peak, partly due to a relative shortage of longer-dated Treasuries from the Federal Reserve's pandemic-induced holdings.
- The article highlights uncertainty regarding whether the Fed has actually peaked, as there has been no clear data justifying a rate cut, which would confirm the peak.
- The ongoing strength of the economy and anticipated inflation readings are expected to maintain or even increase the pressure on the 10-year yield, possibly pushing it to retest the 5% level or even higher.
Useful info to consider. At the end of the day it's all still about inflation. There is a lot that can happen before the Fed's June meeting in terms of the data, and the data will lead the way.
