Following last week’s sudden jolt to the US Treasury market, yields shot further upwards yesterday. Attention has not just shifted away from Greece and the eurozone but it has also begun to focus on the inflationary pressure coming through from rising commodity prices. These rises are not just limited to oil.
However, a more worrying thought, which could send yields in the bond market rocketing, is that the Fed might be falling behind the curve with its commitment to its extended period message on interest rates; that is, not moving away from its super easy monetary policy or indeed, not signaling that the time is coming to move away from it. Given the improving news flow on the US economy, a few FOMC members have been expressing doubts over prolonging the Fed’s super easy monetary policy.
Yet the Chairman and others appear intent on retaining policy as is to ensure that the recent drop in the rate of unemployment is not only sustained but decisively on the way to the Fed’s longer term target of 5 to 6 percent.
However, the hawks on the FOMC are likely to view the more favourable developments for the economy as indicative of a shift in the balance of risks to the upside for inflation and it is beginning to look as if the bond market is thinking that way too. While the more positive developments on the economy should go down well with the equity market, it might easily get rattled by the action in the bond market which sees yields shoot further upwards. Some profit-taking in equity markets would be likely. But that is all it is likely to be. Full article >