Where do yields go from here? Where do yields go from here? http://www.federatedinvestors.com/static/images/fhi/fed-hermes-logo-amp.png http://www.federatedinvestors.com/daf\images\insights\article\forest-path-fog-small.jpg June 1 2022 June 1 2022

Where do yields go from here?

Up, but until there is more clarity, maybe not much.

Published June 1 2022
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With inflation the issue of the moment in D.C., U.S. households, corporate America and Wall Street, the bias on rates remains up. But the one-way trade that took intermediate to long Treasury yields higher for most of this year appears to be transitioning to a more symmetric risk, as the forces of elevated inflation and hawkish Fed face off against the potential for a Fed overshoot and recession. We believe this balancing act will keep the 10-year Treasury yield in 2.70%-3.20% trading range until there’s better clarity over which way the scale tips: sustained elevated inflation or dramatic economic slowing.

To be sure, the market expects inflation to decelerate off its 40-year highs as the Fed tightens rapidly and as growth slows amid the multiple challenges of falling real purchasing power and higher borrowing costs. Additionally, U.S. fiscal policy remains a big headwind, as Capitol Hill retrenches from its unprecedented Covid response, with sharp political divides and inflation making new stimulus unlikely. When was the last time you read or saw a story about Build Back Better?

The big question: can an extraordinarily strong labor market produce sufficient growth and income to avoid a recession as Fed and fiscal policies contract? If inflation falls rapidly, the Fed can ease up on its monetary contraction/tightening campaign, lowering recession risks. That would be warmly welcomed by risk markets. If inflation proves sticky, however, the Fed likely will keep tightening, rates will rise further, growth risks would intensify, yield curves would flatten and risk assets would continue to struggle. It’s a fairly narrow path for the central bank, one it’s struggled to navigate in the past.

The global backdrop is similar, with inflation very high and growth challenges climbing. In Europe, the once uber-dovish European Central Bank has transitioned to a bit of a hawk. In the U.K., the story is much the same. One noteworthy exception is China, which faces additional growth challenges due to Covid-zero policies that locked down large swaths of the country. Lastly, the Russian-Ukraine war continues, exporting inflation and growth risks to varying degrees across markets and regions. Where will all this end? As in the U.S., too soon to say. Better clarity is needed.

Tags Fixed Income . Interest Rates . Inflation .
DISCLOSURES

Views are as of the date above and are subject to change based on market conditions and other factors. These views should not be construed as a recommendation for any specific security or sector.

Bond prices are sensitive to changes in interest rates, and a rise in interest rates can cause a decline in their prices.

International investing involves special risks including currency risk, increased volatility, political risks, and differences in auditing and other financial standards. Prices of emerging-market and frontier-market securities can be significantly more volatile than the prices of securities in developed countries, and currency risk and political risks are accentuated in emerging markets.

Yield Curve: Graph showing the comparative yields of securities in a particular class according to maturity. Securities on the long end of the yield curve have longer maturities.

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