Inflationary dynamics continue to surprise to the upside, and markets now expect the Fed to pursue one of its most aggressive rate hiking campaign in years. U.S. Treasury yields continue to move higher as well. We think we’ve seen the biggest moves higher in yields, but as long as inflationary pressures continue to surprise to the upside, interest rate volatility will likely remain. We still think the 10-year Treasury yield can end the year between 2.75%-3.25%, but we acknowledge there are risks to the upside.
Last week’s higher than expected inflation report was a game-changer for the Federal Reserve (Fed) and bond markets. With inflationary pressures continuing to run much hotter than the Fed’s 2% target, an even more aggressive rate hiking campaign was priced into markets. Markets are now expecting at least a 75 basis point (bp) increase in its short-term interest rate at this week’s meeting and nearly another 100 bp of hikes in the two remaining meetings this year. Moreover, markets expect the fed funds rate to get to 4.5% by early next year.