Last month, when thinking through how geopolitical risks could feed into food production (fertilizer shortages) and inflation dynamics, I was looking for the 10yr Treasury to push toward 4.60%. It got there within a few weeks. The question now is what comes next.
Disruption from war lingers, though I believe the peak panic phase may now be behind us. The bigger story from here is how supply chain shocks and higher fuel prices filter through into the real economy and everyday pricing.
Headline CPI came in at 3.8% and core PCE at 3.3% year over year in April, and I expect inflation to remain elevated for an extended period as higher oil prices gradually find their way into everyday cost structures.
June will bring the new Fed Chair's first meeting, which should help clarify where the policymaker sits along the dove-hawk spectrum.
Fed funds futures are now pricing roughly a 50% chance of one rate hike by year end, which is a meaningful shift compared to a few months ago.
Over the longer run, I continue to maintain a bearish steepening bias amid concerns over a potential large-scale unwind of Japanese yen carry trades. The rate differential between U.S. Treasuries and Japanese Government Bonds has narrowed from roughly 3.5% in 2025 to approximately 1.8% today, while cross-currency hedging costs have not compressed proportionally.
Source: CME Group
