

Inflation expectations remain subdued
Model-based estimates of inflation expectations point to inflation rates less than 3% in 12 months and 2.3% in 10 years. This roughly conforms to consumer expectations of 3% inflation over the next five to 10 years and by expectations derived from the forward markets.


Interest-rate normalization program
It is important for the Fed to restore normal levels of interest rates to extend the range of future policy options and to restore balance among the returns in the financial markets. But the sharp increase in 10-year Treasury yields from 2% to 3% might better have occurred more gradually and under less stressful circumstances.
Real yields remain negative
Because of the sharp increase in inflation, real yields remain negative across all maturities despite the increase in nominal yields. This implies a level of accommodation for long-term investors who will pay back the loans in deflated dollars.
Thirty-year and five-year Treasury yields
You would expect 30-year bond yields to reflect the greater risk of holding a security over that length of time, with the prospect of event risk disrupting economic growth at some point. Instead, we find five-year Treasury yields rising above 30-year yields and the yield spread becoming negative.

Mortgage rates have responded
The average mortgage rate calculated by Freddie Mac shows that new homeowners are facing a 5% cost of carry, substantially higher than the less-than 3% rates of the pre-pandemic era. We expect those rates to put a crimp in the demand for housing which, because of its weight in determining the consumer price index, will have a large impact on the inflation rate.