Treasury yields continue to be on the rise, which could be a bad sign for investors anticipating an interest rate cut at the next FOMC meeting. 10-year yield surpassed 4.6% while the 30-year yield broke 5% for the first time in nearly two years. This sudden spike in borrowing costs could complicate the Fed’s decision further down the line.
Despite today’s positive print at new home sales, housing prices are way overheated, with inflation-adjusted values set to break 300 on the Case-Shiller Index—an all-time high. Even after adjusting for inflation, prices are 66% higher than in 2011 and now 12% above the peak of the 2006 housing bubble. For context, real estate prices from 1890 to 1990 barely exceeded long-term trends by 15%.
This appears to be one of the most significant side effects of America’s aggressive foreign trade policy. As fears of rising costs of goods increase, inflation becomes an even bigger concern. This leads the bond market to basically self-regulate without any input from the Fed. As investors worry that more inflation will lead to higher interest rates—they start demanding higher returns on bonds, causing yields to spike.
After the last FOMC meeting, where the Fed decided to maintain interest rates, as Jerome Powell argued that they were in a good position to “wait and see” what happens—what the Fed may be seeing right now may not be the best case scenario.
Investors who were anticipating a new interest rate cut at the next FOMC meeting on June 17–18 may have an unpleasant surprise if the bond market continues to spike. With financial conditions tightening on their own, Powell and his colleagues may find themselves backed into a corner, forced to reassess their rate-cut timeline far more cautiously than markets initially expected.
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