US | Treasury yields reflect the view that disinflation likely resumed in 2Q

Summary

Mid- and long-term Treasury yields eased further from their late-April’s highs on a less hawkish than expected Fed in this month’s meeting, and fresh signs that the inflation jump in 1Q will prove transitory.

Key points

• Key points:
• “Conservative” inflation projections pointed to a slight improvement of confidence among FOMC participants, which partly explains why Treasury yields have kept declining.
• The modest deterioration of inflation expectations in 1Q reversed this month entirely, even as markets have come round to the view of a high-for-longer approach.
• More good inflation data could push the already well-anchored market-based inflation expectations even closer to 2%, opening the door to a reassessment of the policy rate path.
• This could lead markets to fully price in at least two rate cuts this year; even Powell noted that the Fed’s median forecast of a single cut before year end was a “very close call.”
• Mortgage rates have recently been less sensitive to the evolution of long-term Treasury yields; corporate bond spreads increased slightly, but they remain well below average.

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