Summary:
- U.S. tenure yields are rising towards pre-financial crisis levels due to a resilient economy and anticipation of more interest rate hikes.
- July's Fed minutes contribute to the upward momentum in bond yields.
- Investors perceive a 40% chance of a rate hike by November, reflecting concerns about persistent inflation.
- Different perspectives exist on the impact of further rate hikes on the economy.
- Krishna Guha highlights a tension between moderating inflation and strong growth data.
- The Fed is cautious about overtightening and the potential risks of a recession.
- Agreement among Fed officials is increasing while descents are decreasing.
- Rising bond yields have affected large cap tech, but the impact appears to be diminishing.
U.S. tenure yields are climbing towards their highest level since the financial crisis as continued resilience in the U.S. economy pushes investors towards the possibility for further interest rate hikes. July's Fed minutes are also adding to the momentum.
Investors are now seeing a 40% chance of a rate hike by November after the release showed participants are wary of the possibility that inflation will not ease and further hikes will be necessary. A quote from the minutes says most participants continue to see significant upside risks to inflation, which could further require tightening of monetary policy. The CME FedWatch tool shows probabilities for rate hikes. As of now, the September meeting is expected to have no hike, but the November meeting is more uncertain with a 60% leaning towards no hike. This could impact a 25 basis point rate hike as well, and experts have varying opinions on the matter. One school of thought believes further tightening could damage the U.S. economy, while others suggest the tightening is still making its way through the system. Krishna Guha highlights an emerging tension between moderating inflation data and stronger-than-expected growth data.
Despite the robust economy, the Fed is cautious about overtightening to prevent a potential recession. The level of agreement among Fed officials is noted, with descents decreasing and agreement increasing. Large cap tech has faced headwinds from rising bond yields, but the impact seems to be diminishing. Investors will continue to monitor this situation closely.