US 10-year Treasury Yield at 'Peak'... What's the Direction of Interest Rate Decisions in the Second Half?

Summary

Dr. Kim Hyo-jin from Shinyoung Securities explains why the US 10-year Treasury yield has climbed near 2023 highs despite the federal funds rate staying at 3.75%. She argues that the bond market no longer trusts the Fed's guidance and is instead pricing off the Taylor rule, which points to a fair rate of 5.1% due to stubborn core PCE inflation. She expects the Fed to hold rates in September ahead of mid-term elections but sees a possible year-end hike, and warns that delaying hikes could force a more aggressive move later, unsettling markets.

• US 10-year yield around 4.7% contrasts with a 3.75% fed funds rate.
• The bond market is following the Taylor rule, which suggests an appropriate policy rate of 5.1%.
• Core PCE inflation remains sticky at 3.3%, keeping Taylor-implied rates high.
• Oil prices have decoupled from yields, reducing downward pressure on rates even if oil falls further.
• A gradual rate hike would be less disruptive for equities than a late, aggressive one.
• The Fed is likely to hold in September because of the mid-term elections, with a possible rate hike later in the year.
• Overall, bond yields are not expected to decline soon, and long-duration bonds look unattractive.