If the bond market could speak, it would probably note how a rebounding U.S. economy, stability in commodity prices and encouraging signs in Europe all suggest that the risks of a further decline in U.S. inflation have diminished – and that pressures therefore are building for the Federal Reserve to consider increasing its policy rate.
The bond market voices itself in many ways, and in recent weeks it has become progressively louder, as evidenced by sharply rising global bond yields.
Three gauges in particular are providing strong signals about the bond market’s outlook for U.S. economic growth and Fed policy:
- Treasury yields. Yields have moved well off their lows and for many maturities are at their 2015 highs. The U.S. 10-year, for example, reached above 2.40% today (June 5), well above its 2015 low of 1.64%, which was set in January amid signs of a sharp slowdown in U.S. growth. The yield increase suggests the opposite is occurring.
- Yield curve. A historically reliable indicator, the yield curve has been steepening of late, with longer-dated yields rising faster than shorter ones. Historically, this has signaled faster economic growth that the Fed often tries to quell via rate hikes, lest inflation-wary bond investors push longer-dated yields even higher.
- Forward money market rates. The implied yield on June 2020 eurodollar futures – one of many gauges of expectations about the path of the Fed’s policy rate – increased to 3.07% this week from about 2.50% in April, signaling a rise in expectations for future Fed rate hikes.
If corroborated by economic data, a Fed rate hike will arrive, possibly by September, placing upward pressure on yields and boosting market volatility more generally. Market participants can draw comfort from a focus on the entirety of the Fed’s rate path and persistently low policy rates abroad.