FOMC Inflation Concerns Drive Rates Higher

Rates continue their historic climb. Hawkish FOMC minutes boosted swap rates and Treasury yields yet again today, with the 10-year yield sitting just under yesterday’s intraday, 16-year high at 4.25%. The 10-year is now 10bps higher on the week and 30bps higher on the month, much of which can be attributed to higher Treasury issuance and lagging demand. Meanwhile, the 2-year yield edged slightly closer to the 5% threshold, now at 4.97%.

Fed still sees strong upside inflation risks. According to July FOMC meeting minutes released today, Fed officials were still concerned about persistently elevated inflation. The minutes stated, “most participants…see significant upside risks to inflation, which could require further tightening of monetary policy.” Still, some participants were wary of overtightening, and two FOMC members favored leaving rates unchanged in July. The July minutes framed the difficult path forward for the FOMC – since monetary policy is already restrictive, voters will have to balance the costs of overtightening against the costs of not tightening enough.

Historic yields may be just the beginning. Though the 10-year UST yield is hovering around a 16-year high, former US Treasury Secretary Lawrence Summers feels that long-term rates have significant room to sell-off. Summers cautioned that “I don’t particularly see the current level of longer-term rates as any kind of peak”, adding that he expects large government deficits to “come into focus” over time. High debt could create a “feedback loop” where funding needs create higher issuance, sending rates and interest expenses higher, creating more funding needs, etc. Summers concluded that the 10-year yield could average 4.75% over the coming decade, significantly higher than today’s already historic levels.