What direction should we take from here? Until it becomes clear that the recent rise in inflation is only a temporary increase, we maintain our view that a path towards 5% for the 10-year Treasury yield is feasible. When inflation eventually slows, the Fed could cut rates and the Treasury market could rebound, pushing 10-year rates toward (or temporarily below) 4%.
But if the Fed cuts rates several times and the market starts to see a bottom in funds rates in the 3% to 4% range, the 10-year yield could quickly rebound to 4.5%. In fact, barring a deep recession, the 18-24-month outlook is more likely to settle at 5% in 2010 than 4%.
For issuers (or fixed rate hedgers), this identifies an opportunity for all-in interest rate levels to decline in the second half of 2024. That will likely happen within three to six months after the Fed starts cutting rates. Be cautious, however, as this window may be on the short end (given continued deficit-related issuance pressure). As this window closes and 10-year Treasury yields return to current levels, or perhaps higher, all-in issuance levels will rise again.
For asset managers, it is a strategically short duration of one month. Then, tactically, it continues as long as inflation falls and the discount for rate cuts actually becomes tighter. But the structural view through all this is actually short (although running yields provide some good protection, but not completely).
