The steeper yield curve
Long-end yields are rising while the front end softens. The main driver is a small drop in short-term yields. Softer inflation prints last month and a weaker-than-expected jobs report have cut back expectations for the Fed's rate path, pulling short-term yields down. The factors keeping long-term yields high are still in place.
Oil prices add to the picture, with heavy swings tied to Middle East news, though this is a minor driver. More weight comes from supply. The U.S. fiscal situation raises supply worries, and there is heavy supply beyond Treasuries - corporate bonds and a wave of stock IPOs. All of it needs to find demand.
The U.S. economy stays firm and keeps growing, which supports a steeper curve. A steep curve fits a growing economy, and that is what is showing up now. This points to a higher-for-longer period, with bouts of volatility around the will-they-or-won't-they debate over the Fed. With the 30-year Treasury above 5% and the 10-year near 4.7%, these yields will likely hold in those ranges unless the economic outlook shifts a lot.
Japan and foreign demand
Long-end yields are rising worldwide, which feeds into the U.S. story. The 10-year Japanese government bond is pushing its highest level since 1996.
The international capital (TIC) data gives insight into foreign demand. The reading due this afternoon covers June, after the joint U.S.-Japan intervention, but still shows trend direction. There is standing worry, among the public and the administration, that foreign investors might sell Treasuries and push U.S. yields even higher. Bessent and his team have flagged concern that Japan could dump Treasuries on the long end to prop up its currency.
So far there has been little selling from foreign official investors - central banks and governments. There are shifts under the surface. Japan is the largest holder of U.S. Treasuries, and if it started selling to fund its currency intervention, that alone is a risk. On the other side, demand from foreign private investors is strong. These private buyers are more price-sensitive; they chase attractive opportunities rather than hold for reserve purposes.
The global rise in long-term yields, especially in Japan, is another piece keeping U.S. Treasury yields high. As investors scan the globe for the best return, better chances at home - in Japan or parts of Europe - could pull the marginal buyer away from the U.S. and add pressure. The 30-year is unlikely to move much higher, but there may be a floor under it. Where that floor sits remains to be seen, but something should keep yields trading near current levels for now.
The Fed's next move
The base case is for the Fed to sit on its hands, wait, and watch the data. Kevin Warsh heads into Jackson Hole with a bit more breathing room given recent data. Some commentary argues the Fed could hold off hiking for political reasons ahead of the midterms, to avoid rocking the boat with the administration, which would push any hike expectations out to perhaps the January meeting.
Politics may be on some Fed officials' radar, but it should not be a key driver. History has plenty of election cycles where the Fed acted, and there is no clear calendar line for when action becomes off-limits. The data right now suggests the Fed does not need to do anything, regardless of the midterms or what the administration wants.
A hike is not off the table. If reports run hotter than expected - in the labor market or inflation - the case to do nothing gets hard. This may not show up in next week's PCE but could appear in the August readings. Inflation has been above target for more than five years, going on five and a half. A number of officials remain nervous about underlying inflation trends, and the Fed's mandate is to get inflation to 2%. If one or two hot readings come in, standing pat becomes tough to justify. Politics plays some role, but it will not be the deciding factor in what the Fed does at any given meeting.
