Short-term yields should continue trending higher, but longer-term yields remain relatively muted. The real yield curve should continue flattening quite aggressivelyPowell’s speech triggered a rise in short-term real yields. The real peak Fed Funds has a very tight relationship with the S&P 500.
Nevertheless, we remain in a bear market, and net gamma is now negative, meaning a greater potential of more short-term follow-through on the downside. Short-term yields will likely continue to experience upward pressure, but as long the dynamic persists that this is a garden-variety rise in inflation — easily solved by some fairly modest rate hikes — then longer-term yields will continue to “under-reflect” the increase in rates.
As long as term premium remains contained, flattening pressure on the nominal yield curve will continue. However, the real yield curve should continue to flatten more aggressively as the Fed maintains its hawkish stance and inflation begins to ease.
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