Markets are navigating tensions between a Fed that offers less guidance and an inflation backdrop that remains sticky. Added uncertainty from Middle East tensions and energy-price swings is further shaping sentiment, with recent moves in Treasury yields suggesting the market wants the Fed to hike. However, with yield volatility expected to linger in the near term, we see today’s elevated Treasury yields as an especially compelling opportunity in fixed income.
Renewed tensions in the Middle East, volatile energy prices, and still-resilient U.S. growth would be enough to unsettle fixed income markets. Last week only added to that unease: the Federal Open Market Committee left the fed funds rate unchanged, and Chair Kevin Warsh followed through on the less transparent approach to forward guidance he had signaled, deepening uncertainty around the path of policy ahead.
The market continues to expect the central bank to hike by year end, although near-term expectations came down slightly after the meeting. Futures still imply meaningful odds of additional tightening by year end, and based on history, recent moves in the two-year Treasury yield suggest that investors see Fed action as plausible.
Still, the Fed has made clear that its next move will hinge on inflation, and June core inflation data were somewhat softer, indicating some progress even if price levels remain above target.
This week began with renewed U.S.-Iran talks, which helped push yields lower as oil prices retreated and some energy-driven inflation fears eased. But with bond volatility still high and several Treasury yields recently touching year-to-date highs, we continue to view current yield levels as attractive entry points. We expect the Fed to stay patient and data-dependent for longer than investors seem to currently anticipate, which in our view, underscores the opportunity in today’s yields.
