According to the Research Department at BBVA, Treasury yields are likely to rise further, peaking at the time when the Federal Reserve end with tightening monetary policy. They point out current Treasury yield spreads seem to continue to price in a soft landing.

Key Quotes: 

“Slowing demand to bring down inflation without significant pain is “not getting any easier”; markets (still?) price in a soft landing.”

“With the Fed set to hike rates to a “modestly restrictive level” by year-end, the tightening pace is already faster than the one seen in the 1994-95 hiking cycle.”

“Market-based inflation expectations point to continued confidence that, over the longer term, the Fed will be able to bring down inflation to the 2.0% target.”

“Futures markets are currently pricing that the fed funds rate will peak above 3.5% in mid-2023 which is broadly in line with the updated fed funds rates central tendency FOMC projections.”

“With a flat yield curve ahead, we expect both 2-and 10-year yields to keep moving in sync, while shorter-term Treasury yields continue to catch up, driven by upcoming Fed hikes.”