Trick and Treat

Despite the Fed’s treat of a 50-basis point cut in mid-September, the 10-year Treasury yield has played a trick on many market participants by climbing nearly +60 basis points to 4.2% since then. This move, however, didn’t catch us off guard. In our recent commentary, we highlighted the likelihood of long-term rates increasing even as the Fed cut short-term rates. While the Fed controls the short end of the yield curve, broader economic forces drive longer term interest rates – and those forces are gaining momentum. Last week, Atlanta Fed updated its estimate for third quarter GDP growth to a solid 3.3% and inflation expectations have edged higher (Figure 1). These trends cast doubt on the Fed’s ‘dot plot’ (projects 150 basis points of rate cuts through 2025) and is a driver behind our recent decision to reduce duration across our taxable fixed income portfolios.

Fig. 1: US Federal Reserve Five-Year Forward Five-Year Breakeven Inflation Rate 

 

Source: Bloomberg, Mill Creek.

 

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