Fixed Income Viewpoints: How Tight is Too Tight?

The Viewpoints series gives investors Lazard’s perspectives on the latest macroeconomic and fixed income news and trends. In this edition, Lazard Asset Management's fixed income team examine whether the recent sharp surge in 10-year U.S. Treasury yields could mean the end of the Federal Reserve's monetary policy tightening cycle.

The Federal Reserve may have begun the job of tightening financial conditions 19 months ago, but the bond markets have taken up the cause. Between late July, when the Fed last raised interest rates, and mid-October, the benchmark 10-year U.S. Treasury yield rose more than 90 basis points (bps) in a prolonged sell-off of Treasury bonds.

The 10-year yield rose high enough at one point in early October that Fed Vice Chair Philip Jefferson and several Fed governors publicly stated another rate hike may not be necessary. After these remarks, the 10-year yield pulled back, and the surprise attack on Israel by Hamas on 7 October prompted some “safe-haven” buying. However, the bond rally was short-lived: A steady flow of strong U.S. economic data and concern over the potential impact of a wider Middle East conflict on oil prices sent yields higher once again.

When Lazard’s fixed income professionals met in mid-October, they agreed that the Fed could be done with its tightening, but they debated whether the bond market had finished its part—and what higher long-term US rates would mean around the world.

Click here to read the October issue of Fixed Income Viewpoints.