Traders Bet Warsh's Fed Will Hike Rates by December

Summary

Kathy Bostjancic discusses the inflation outlook and bond market dynamics. She sees the Fed staying on hold for the rest of the year, with risks from energy spillover but not the base case. Long-term Treasury yields at 4.5-5% are attractive, and investment grade corporate bonds offer a yield pickup with strong demand.

• Inflation debate centers on whether energy price shocks will spill over to core inflation.
• Fed likely remains on hold through end of year.
• 10-year and 30-year Treasury yields at 4.5% and 5% are seen as attractive by institutional investors.
• Investment grade corporate bonds provide a yield pickup over sovereigns with tight spreads.
• Record sovereign debt issuance has not caused crowding out due to strong investor appetite.
• Equity market strength creates a fear-of-missing-out trade-off with bonds.
• Insurance companies are comfortable extending duration to match long-term liabilities.
• Risks to the outlook depend on the duration of energy supply disruptions.