Old habits, New cycle

The bond market is behaving differently in this easing cycle. Since the 80’s, where Paul Volcker ended the toughest interest rate tightening of recent history, the 10 year yield has followed, on average, the path shown on the chart below, where yields were gradullay lower starting before the Fed began easing, and continuing for at least 6 months with an average decrease of 40 bps. In the current cycle, the 10 year yield has increased almost 100 bps since the Fed started easing. What has changed? Perhaps the long downtrend in the 10 yr yield that started with Volcker, ended in 2022, where the Fed raised interest rates, and now the trend is no longer our friend, and we have entered a new long term cycle of rising yields, and rising inflation. Related to that, fiscal dominance, where the U.S. government has increased spending, and the budget deficit, is increasing the pressure on yields. If the new administration, that starts in 10 days, is able to reduce spending, they might be able to lift some of that pressure and allow the bond market to stop the yield rise.

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