Where do 10-year yields belong?
In the past year, they've traded from 3.7% to 5.0% as the market struggles with questions about future inflation and interest rates. The mid-point of that range is 4.35%, which is a tad below the 4.49% currently.
Yields rose 2 bps today after weaker demand at a Treasury auction led to a 0.9 bps tail. That follows a stronger three-year auction yesterday and leaves the market waiting for more data.
There isn't much to watch for this week but next week we get the latest CPI report. It follows a string of higher-than-expected releases to start the year that has contributed a large portion of the run-up in yields. Lately though, there are signs of softening demand and employment, something that should eat into future inflation and -- ultimately -- interest rates.
What's not certain is how much of a slowdown there is and if more is coming. That has the market on edge regarding every release and we could quickly be talking about 5% 10y rates again if CPI surprises to the upside and the Fed is forced to hike.
On net though, I think we're still in a low-inflation world and that will eventually be reflected in Fed funds in the 2-3% range, which should pull 10s down to the same range or 50 bps higher. But I don't think anyone can say that with high conviction right now with services inflation remaining sticky and housing appearing to be under-supplied.
