US 10-year returns
Where do 10-year returns belong?
In the past year, they have traded from 3.7% to 5.0% as the market faces questions about future inflation and interest rates. The midpoint of this range is 4.35%, which is just below 4.49% currently.
Yields rose 2 basis points today after weak demand at the Treasury auction led to a 0.9 basis point decline. This follows a stronger three-year auction yesterday and leaves the market waiting for more data.
There's not much to watch this week but next week we will get the latest CPI report. This comes after a series of higher-than-expected issuances at the beginning of the year, which contributed a large portion of the rise in revenues. However, there have recently been signs of declining demand and employment, something that will impact future inflation and ultimately interest rates.
What is uncertain is how much of a slowdown there is and whether there will be more to come. This causes the market to become nervous regarding each release and we could quickly be talking about 5% for 10-year interest rates again if the CPI surprises to the upside and the Fed is forced to raise interest rates.
Despite this, I think we are still in a low-inflation world and that will eventually be reflected in Fed funds in the 2-3% range, which would pull the scores to the same range or 50 basis points higher. But I don't think anyone can say that with much confidence at the moment with utility inflation and housing supply shortages seeming to remain flat.