Bond Prices Go Drip, Drip, Drip

The 10-year US Treasury bond yield rose above 4.00% at the beginning of August on better-than-expected economic data. It rose above last year's peak of 4.25% today, trading most recently at 4.32%, following the release yesterday of July's FOMC minutes, which strongly suggested that solid economic growth might keep inflation above the Fed's 2.0% target unless the Fed continues to raise interest rates.

In our opinion, the Fed is risking overkill since headline and core CPI inflation rates excluding shelter (on a y/y basis) fell to 2.0% and 2.5% in July (chart). Shelter inflation will undoubtedly be falling in coming months. Meanwhile, still higher commercial mortgage rates would undoubtedly increase defaults, and weigh on the banking industry.

We are counting on Fed Chair Jerome Powell to calm the bond market in his Jackson Hole speech at the end of next week. He might do so by saying that if inflation continues to moderate then the Fed would probably lower the federal funds rate next year. That would also help to reduce the pressure on the federal deficit, which is ballooning along with the government's net interest expense. Granted, this might be wishful thinking on our part.