The Federal Reserve (Fed) confirmed its dovish stance on monetary policy at last week’s Federal Open Market Committee (FOMC) meeting. The bond market remains skeptical of the Fed’s ability to maintain accommodative policy while also keeping inflation in check. The next several quarters will be telling for inflation as the economy slowly returns to greater normalcy and the full extent of the monetary and fiscal stimulus takes effect. As yields have risen to around the 1.7% mark on the 10-year Treasury, high-flying growth stocks have paused their rally in a rotation toward more of the cyclical names.
This week’s Treasury auctions will be closely watched, especially the seven-year auction. Budget deficits will continue to drive up the supply of Treasuries, and with yields rising, the number of buyers will be scrutinized. Yields have increased considerably this year, generating negative price performance across most bond asset classes. I expect yields to continue to rise, but a short-term relief rally is a good possibility in the next few weeks.
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