As policy uncertainty over trade has gripped markets in recent weeks, yields on U.S. bonds have experienced notable volatility that is most likely establishing a new center of gravity in markets.
The result could be higher rates ahead even as growth slows and inflation rises.
Through March 20 this year, the benchmark 10-year yield has traded between a low of 4.15% on March 3 and a high of 4.79% on Jan. 14, with an average of 4.47%.
Yields normally fall during periods of slower growth, but given the probability of a large increase in tariffs starting on April 2, investors are likely to see even more volatility.
On Wednesday, the Federal Reserve raised its forecast for the core personal consumption expenditures price index, its closely watched measure of inflation, to 2.8%. Under that scenario, the 10-year yield would move back toward 4.5% with risk of a move even higher as the next few rounds of data on pricing arrive.
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But there was little consensus over how to interpret the Fed’s meeting: Market players interpreted it as dovish in contrast with economists, who viewed it as hawkish. That split is creating the conditions for more volatility ahead until the new rules of the road on trade and finance can be established.
