US | Do lower yields signal that the Fed might shift its focus back to growth risks?

Summary

A recent string of weak data together with the postponement of tariffs and a less worrisome fiscal bill than feared likely eased market participants’ bets of a scenario in which the Fed keeps interest rates at their current level for the whole year.

Key points

• Key points:
• The 2-year Treasury yield is down 30 bps from the high it reached a week before Trump’s inauguration; the 10-year yield has fallen by c. 30 bps so far this month.
• They have come down in spite of high uncertainty; PCE inflation due out this Friday could either reverse or reinforce this trend if it surprises market expectations.
• Bond market volatility measures suggest that investors have continued to respond to incoming data without signs of panic despite the continued uncertainty.
• Market-implied 5-year inflation expectations are echoing recent survey-based evidence that has shown that US consumers are increasingly concerned about short-term inflation.
• Within this context of mixed signals, the futures market implied odds of no rate cuts this year dropped from 30% in early February to less than 10% in the last few days.

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