Bond Yield Climbs to 4.50% As Yield Curve Is Disinverting.

The Fed's hawkish pause, announced on Wednesday afternoon, has lifted the 10-year US Treasury yield to 4.50% this evening. We think it might consolidate here for a while consistent with our view that the yield has normalized back to where it was from 2003-2007, i.e., before the Great Financial Crisis (GFC). Back then, the 10-year TIPS yield and the expected inflation spread hovered around 2.00% and 2.50%, respectively (charts).  Currently, the TIPS yield is 2.11% and the expected inflation spread is 2.38%.

The yield might rise to 5.00% if the TIPS yield climbs to 2.50%, while the inflation spread rises to 2.50%. That would also be consistent with the pre-GFC old normal.  (BTW: It's interesting to observe that the expected inflation spread is very highly correlated with the price of copper, which remains under $4.00 per pound despite recent attempts by the Chinese government to stimulate growth.)