Fed tightening and bond yields

Fed and bond yields… While hawkish statements from the Fed persist, US Treasury bond yields also show a marked upward trend. The analyzes that global stocks are so mixed and that the Fed may step back in case of a downward correction in the markets have been refuted by the persistent tightening statements of both Powell and other Fed members. The Fed’s stance is portrayed as very tough and hawkish.

US 2 and 10 year bond yields.. Source: Bloomberg

Powell statements… Powell reiterated that the main purpose of the Fed is to reduce inflation and said that they would reduce inflation if necessary, even if it means an increase in unemployment. Aggressive expectations are also being re-weighted within the framework of the hawkish WSJ interview, in which the Fed said it would not hesitate to raise interest rates (if necessary) higher than neutral.

On the basis of data; Retail sales rose strongly in April, while production at US factories increased more than expected due to strong demand for motor vehicles and other goods.

After the announced data, the 10-year bond yields continue to hover around 2.85%. The effect of the trend in 2-year bond yields on the yield curve keeps the recession debates alive.

Fed funds futures expect the Fed to raise interest rates by 50 basis points at the next FOMC meetings in June and July.

Fed futures funds interest rate projections.. Source: Bloomberg

Conclusion? The Fed is still in a seriously hawkish trend. After Powell’s statements, the real question is: Will the Fed go to larger rate hikes? So it’s acting as 75 bps and not 50 bps? Of course, faster rate hikes towards terminal interest also increase recession concerns. It has become more critical at what level the Fed sees the terminal rate.

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