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Market Minute: The end of bond-market complacency

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After shrugging off the breakout of war in the Middle East, the front end of the U.S. bond market is now pricing in the risk of higher inflation and the likelihood of reduced real, or inflation-adjusted, returns on investments.

Since the attack on Iran on Feb. 28, the yield on 2-year bonds has moved step by step with the price of Brent crude oil.

While Brent crude has moved from $60 per barrel to $110 in a step-wise fashion, the yield on 2-year Treasury bonds has jumped nearly 75 basis points.

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The takeaway

Two-year Treasury yields are considered the present value of the setting of the Federal Reserve’s overnight policy rate, with the current effective funds rate now sitting at 3.65%.

With 2-year Treasury bonds above 4.1% on Tuesday, that implies upward of two 25 basis-point rate hikes by the Federal Reserve.

This rise presents a conundrum for monetary policymakers advocating rate cuts in the midst of an economy driven by red-hot nonresidential investment and a growing energy shock both of which are causing inflation to increase.

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About Joseph Brusuelas

@JoeBrusuelas

Joe Brusuelas, “chief economist to the middle market,” is the preeminent voice championing issues and policies facing midsize companies in the United States and around the world. An award-winning economist, Brusuelas has more than 20 years’ experience analyzing U.S. monetary policy, labor markets, fiscal policy, international finance, economic indicators and the condition of the U.S. consumer.

A member of the Wall Street Journal’s forecasting panel and the UCLA Anderson School of Management's Board of Directors, Brusuelas regularly briefs members of Congress and other senior officials regarding the impacts of federal policy on the middle market and the factors by which middle market executives make business decisions. He also frequently offers his insights on the U.S., Canadian and global economies in the financial media. In 2020, he was named one of the 100 most influential economists by Richtopia. In December 2023, Brusuelas and the economics team were recognized on Bloomberg's list of Best Bond Forecasters after correctly predicting where the benchmark Treasury would end the year.

Before joining RSM in 2014, Brusuelas spent four years as a senior economist at Bloomberg L.P. and the Bloomberg Briefs newsletter group, where he co-founded the award-winning Bloomberg Economic Brief. Earlier in his career, he was a director at Moody's Analytics covering the U.S. and global economies for the Dismal Scientist website. He also served as chief economist at Merk Investments L.L.C. and chief U.S. economist at IDEAglobal.

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