Treasury yields are creeping above the top of the recent range in an unsettling move today. That's weighed on stock futures, which are down 0.2%, and helped to lift USD/JPY by 40 pips.
The question remains: How much of this is pricing out a recession and how much of it is pricing in inflation?
I'm in the camp that the vast majority of it is about erasing the recession fears from late July in light of a Fed put and much better economic data. On Friday, I went through 16 corporate conference calls and it was tough to find any indication of a slowing economy.
But every tick higher in yields is a warning sign that the 'pause' in Fed rate cuts might come sooner than expected. US 2s are creeping towards 4%, which is still restrictive. So long as you believe that the Fed will cut in a weakening economy, 400 bps of ammunition is fine but if it's a situation where they can't cut because of inflation.
Perhaps the election is driving the trade right now so we will have to wait two weeks before any clarity there. Ian Lyngen from BMO highlights 4.17% as the level to watch in 10s:
In the week ahead, there is a limited docket of fundamental events that could inspire trading direction in the US rates market. The resulting environment will be one in which external markets, headlines, and other developments will have a disproportionately large influence on the direction of yields. It’s also a backdrop for the technicals to be of elevated relevance as the recent bearish tone has brought yields to the top of the local yield range. The 200-day moving-average in 10s remains a bearish beacon at 4.170% and in the event of another leg lower, this will be our target as well as a potential inflection point for dip-buyers.
