US | Higher long-term yields on strong growth

Summary

The yield curve has flattened as mid- and long-term yields have moved up sharply “not because of inflation”; it probably has “something to do with stronger growth” and more recently with a more hawkish Fed.

Key points

• Key points:
• Last week, the FOMC decided to hold the federal funds rate steady at a 22-year-high 5.25-5.50% target range.
• The accompanying Summary of Economic Projections (SEP), especially the dot plot, reinforced the higher for longer rhetoric.
• The 10y-3m spread reverted half of its recent negative low, driven by the spike in long-term yields and the proximity of the end of the hiking cycle.
• Real interest rates are “well above mainstream estimates of the neutral policy rate.”
• This is a welcome development for the Fed as “meaningfully positive” real rates will help to get inflation down to target.

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