US | The Treasury market prices in the Fed is likely behind the curve

Summary

July’s meeting minutes confirmed a Fed’s dovish shift, with "a vast majority" of FOMC officials observing that "it would likely be appropriate to ease policy at the next meeting."

Key points

• Key points:
• Yields on 2- and 10-year Treasury notes have declined by c. 40 and 30 bps so far this month to their lowest since late December 2023.
• Both 3- and 6-month T-bill yields also suggest the Treasury market is fully convinced a 25bp rate cut is around the corner.
• The 10y-2y yield spread uninverted briefly on the pessimism around the economic outlook, but a soft landing is still the most likely outcome.
• "A couple" of participants noted that inflation pressures "might persist for some time," but most are likely confident enough to begin cutting rates.
• Professional forecasters revised down their Treasury yield projections, but they likely fell short due to unfortunate survey timing.

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