US | Treasury yields and interest rates will likely peak once the Fed is done tightening

Summary

Bringing inflation back down to target will likely cause “some pain”; yet, markets are (still) pricing in a soft landing. With the Fed set to hike rates by 50 bps in June and July, the tightening pace is set to be the fastest since the 1994-1995 hiking cycle.

Key points

• Key points:
• Long-term yields have risen recently, comparably more than shorter-term yields. As a result, and with expectations of a 75 bps hike off the table in the near future, the yield curve steepened somewhat.
• Overall, current Treasury yield spreads seem to be pricing in a soft landing. The 3m10y Treasury yield slope is not currently pointing to increased chances of an upcoming recession.
• Futures markets are now pricing that the fed funds rate will peak at 3% (vs 3.25-3.5% just a week ago), as markets begin to wonder about the probability of a soft landing, which nonetheless is still the scenario markets are pricing in.
• Professional forecasters revised up their interest rate projections. As the long end of the yield curve rose sharply in recent months, 75% of respondents now expect the 10-year Treasury yield to peak at a level of up to 4% by 2024.

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