US | Treasury yields signal confidence that inflation will soon cease to be an issue

Summary

Even though the recent bond rally appears to have come to a halt, both mid- and long-term Treasury yields have been pricing in the start of a rate-cut cycle for some time.

Key points

• Key points:
• Short-term yields will eventually follow suit once the rate-cut cycle begins, possibly resulting in a complete flattening or even a slight steepening of the yield curve by year-end.
• The term premium has been in negative territory since mid-December, supporting the idea that its spike last year was mainly linked to uncertainties around the policy path.
• Market-implied inflation expectations will likely continue to gradually lose relevance for policy decisions as hard data continue to suggest that inflation will soon cease to be a problem.
• The futures market has ruled out further hikes and prices in a 57% chance of a rate cut in March. It continues to anticipate 150 bps worth of rate cuts throughout 2024.
• Improved inflation expectations mean the Fed will likely need to cut rates soon as risks of over-tightening its policy stance grow.

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