US | Market-implied Fed rate path remains unchanged despite lower yields

Summary

Treasury yields declined following a softer-than-expected January headline CPI reading, which continued to indicate limited tariff pass-through. However, the inflation report also signaled that disinflation momentum in cyclical components has somewhat slowed.

Key points

• Key points:
• The recent yield curve downshift could reverse if the “meaningful” risk of inflation running persistently above target, acknowledged at the latest FOMC meeting, begins to materialize.
• Bond market volatility has edged up from last month’s lows, though it remains well below its historical average, indicating little sign of stress in the Treasury market.
• The downshift in the real yield curve suggests that the drop in nominal yields is also partly attributable to term premium repricing, which this week fell to its lowest level in three months.
• The futures market remains aligned with the Fed’s well-telegraphed plan to extend the pause in its rate-cutting cycle over the coming meetings.
• The 30-year mortgage rate hit its lowest in 3.5 years, while still historically low corporate spreads have shown a slight upward trend over the past month.

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