Market Pulse

Research evidence excerpt

Market Pulse

The other story for traders continues to be the spike higher in US and global bond yields. As we said yesterday, that rise

in yields is probably attributable to the the rise in long-term inflation expectations and inflation risk premiums globally,

and in the US in particular. That's making nominal coupon-paying assets less attractive, and putting upward pressure on long-

term yields. Aggravating this move in the US is that the Fed has been late to signal that it has moved toward a neutral policy

bias, let alone a tightening bias. (In other central banks, such as the BoE, ECB, and BoJ, the tightening bias has been more evident

in recent speeches and rhetoric.) That Fed "lateness" is likely exacerbating worries about inflation that had already been brewing

because of higher crude oil prices, conflict-driven supply shocks more generally, and second-round inflation effects being felt

through a structural rise in inflation expectations. The 10-year US Treasury yield is now up 35bps since the beginning of year,

and the highest since May 2025, when inflation concerns were being driven by tariffs and worries about de-globalization.

That the Fed has been too slow to respond is evident in the behavior of short-term bond yields too. One has only to look

at the two-year UST yield, which has generally been a good predictor of the Fed's evolving policy outlook. It was as late as last

week that the 2-year yield (now at 4.08%) moved more than 25bps above than the upper end of the Fed Funds target range

(3.75%), even though the US-Iran War (and the oil price spike) began more than two months prior, and even though long-term

(10-year) inflation breakevens have been inconsistent with the Fed's 2% inflation target since the first few days after the War

began.