US 10-year bond yields, FOMC and recession dynamics

Divergence in USTs… US 10-year bond yields have regressed to the 2.75% band and the yield curve condition continues to provide recession. While the markets are weighing on the expectations of a Jumbo rate hike regarding the Fed’s decisions in the middle of the week, the medium-term perspective changes in the dynamics of CPI and stagflation. The Fed is expected to loosen its stance due to both fears of recession and inflation, which is expected to decline next year.

Comparison and spread of US 2 and 10-year bond yields… Source: Bloomberg

Fed projections… Expectations for the Fed show divergences in the short and long term. If the Fed raises a total of 175 or 150 basis points in 2 meetings, it will have reached the target rate for this year before the end of the year. The bottom line will be how far the target rate will go, rather than the Fed’s 75 or 50 basis point hike in a single meeting. Not an increase of 75-75 or 100-75, but a probability of a higher level than previously predicted. Due to the weight of directly intervened phenomena such as services and demand in inflation, it is highly likely that the Fed’s interest rate movements will serve the purpose of the monetary policy.

Conclusion? The effect of the decrease in the US 10-year bond yields will perhaps expand a little more and we will watch 2.70% in the 10-year term. Well, if we look at why 10 years has reacted like this in an environment where the Fed is considering raising interest rates so fast, the reason is obvious: Recession. An inverted yield curve is an indication that market participants think the Fed should eventually loosen monetary policy as economic activity weakens. On the other hand, 2 years continues its upward trend as it is a maturity that directly reacts to the monetary policy and the current inflation movement.

Kaynak: Tera Yatırım
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