After a six-month downward trend in the yield of the ten-year U.S. Treasury Note, that tide has stalled, if not turned a bit after Jerome Powell and the Fed cut the Fed Funds Rate by 0.50%. As you can see from the far-right portion on the chart below, the interest rate on the 10-Year spiked from 3.63% last week to 3.75% as of September 25th.
Interest rates can rise for many reasons, and in this instance, we believe it is a culmination of many factors. Jamie Dimon, CEO of JP Morgan, was recently interviewed during The Atlantic Festival and voiced his concern over persistent inflation amidst the “remilitarization of the world,” along with the impact of deglobalization, among other things. We believe that although Fed Chairman Jerome Powell stated, “the upside risks to inflation have diminished,” bond investors are still a little cautious that inflation may be a sticking around a bit, pushing inflation expectations and therefore long-duration interest rates up a bit. At this time, we are a bit more optimistic regarding the ability of the Fed to keep inflation at or near this level. However, we do think they will find it difficult to get them down to two percent, one half of their dual mandate. In our opinion, don’t expect rates on the long end to fall much further. That will be done on the short end.
Sources, Federal Reserve; JP Morgan
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