The 10-year Treasury yield has reversed sharply higher this month, rising more than 50 basis points (bps) off its July low. Quite a lot has changed that could impact the direction of yields over coming months.
• The market is now pricing in 127 bps in hikes by December versus the previous 94 bps
• The market is now pricing in 141 bps in hikes remaining this cycle versus the previous 94 bps
• The implied Federal Funds Rate for December 2023 is now 70 bps higher versus July
• The $280 Billion Dollar Chips Act was signed into law on Aug. 9
• An even larger Inflation Reduction Act was signed into law on Aug. 16
• This week student loan forgiveness was announced and could amount to $300 billion
The Fed has continued to signal a higher for longer outlook on the Federal Funds Rate and the market obliged with some repricing this month. What is more relevant for yields, especially longer-dated maturities, are the government spending programs amid already high inflation readings.
A big risk for long bonds is prioritizing government spending over stable prices. Actions taken this month appear to shed important light on the matter.