The slide in Treasury yields extends. What’s driving it

What’s the thinking on the dip?

The CRB commodity index just hit an all-time high, PPI today was at the highest in at least 10 years and yet yields are falling. Why?

For starters, the PPI data wasn’t as high as feared, especially excluding food and energy. So companies might not be quite as eager to pass along higher costs.

The bigger factor, I believe, is that the bond market is pricing in Fed hikes. The tone around the Fed has changed from confidence in managing an inflation overshoot to worry about high inflation. That’s the kind of thinking that will lead to sooner hikes (Sept 2022 is now 80% priced in).

How could rate hikes be bad for bonds? The thinking is that the Fed — by acting aggressively — will snuff out and real inflation and could risk locking in another decade of yields pinned to the floor.

I’m not fully on board with that thinking but we’ve seen different riffs on that all summer. It’s weighing on yields in the belly of the curve today, or it could be as simple as flows.

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