The US 10-Year Treasury rolled over mid-summer 2020, and has been trending lower ever since. Meanwhile, most other markets that I follow, have spent considerable amounts of time in some level of flux, with no clear sense of direction with the price action. Gold and the Dollar have been standouts, as they have both had periods of high correlation (positive for gold vs negative for the dollar) with the US10YR. With its decisive move lower, the 10-year treasury is delivering on a promise by the Fed to fight inflation the best way they know how. The second part of the Fed's promise however, higher rates for longer, is still yet to be determined.
Orthodox macroeconomics suggests that monetary policy tightening as rapidly as it did, should have at minimum exposed deep fault lines in financial markets, and at most caused some kind of market calamity. We saw cracks this spring but no fault lines, when three poorly managed banks went out of business in rapid succession. Since then rates have moved higher at every point along the yield curve without much commotion. Some market participants suggest this means the Fed might actually accomplish what is now dubbed a 'no landing', wherein they can coax inflation back down to their target of 2% without causing a significant increase in unemployment. As romantic as that scenario sounds, it most likely has the lowest probability of occurring because it ignores the stochastic nature of disruptive market shocks.
A more likely outcome has some subtlety to it. As promised by the Fed, rates on the front end of the yield curve will remain elevated, barring some sudden and rapid rise in unemployment. The middle and back end of the curve however, which are manipulated by market forces, will continue to drift higher as the bonds are sold off. US rates are currently sitting at or around 5% across the curve, and as long as inflation remains above the Fed's target and the US consumer has a job and access to credit, there is room for potentially more monetary policy tightening. The omnipresence of inflation in the hearts and minds of Fed members and market participants alike is currently being reflected in the bear steepening of the yield curve.
The evolving outlook for the term structure of US rates suggests that, short-term yields may remain elevated which in-turn means that medium and long-term yields will experience upward pressure as well. If the resilient consumer can keep borrowing despite rising interest rates and the change in the unemployment rate indeed remains subdued, then there is a scenario albeit with a low probability wherein the yield curve can eventually reflect a positive term premia. This for all intents and purposes will be the market manifestation of the ever elusive 'soft landing'. Enter a world where the economy adjusts to higher rates, the yield curve steepens, and the inverse relationship between stocks and bonds that make the 60/40 model portfolio work re-exerts itself.