US | Despite expected cuts, investors push Treasury spreads higher

Summary

Three developments shaped the Treasury market over the past month: a weak jobs report, a dovish tone from Powell at Jackson Hole, and renewed political pressure stemming from Trump’s push to replace Governor Lisa Cook from the Fed’s Board.

Key points

• Key points:
• The 2-year Treasury yield has fallen by ~35 bps since late July, but the reaction in longer maturities was far more limited, as US debt term premia remain elevated.
• Despite recent economic developments Treasury market volatility has remained contained. The MOVE index shows markets have navigated these episodes in relative calm.
• A slow but steady rise in 5y-5y forward inflation expectations suggests growing concerns that political interference may undermine the Fed’s ability to keep inflation anchored.
• Markets are pricing in near certainty of a September rate cut, though still assign a ~13% chance that upcoming jobs and inflation data could shift the outlook and delay easing.
• The August survey of professional forecasters showed little change in Treasury yield forecasts compared to May. They continue to project the 10-year yield will struggle to break below 4%.

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