Multi-Week Yield Ranges Respected, Dovish Fed Repricing Likely Required For Extension Lower

2s and 10s have failed to breach late March yield lows. Bulls will be eying potential triggers for a range break.

• Tomorrow’s CPI release provides the next major fundamental input, although we note that there is an unusually wide range of estimates for the core readings and uncertainty surrounding some sub-indices, heightening the need for caution when interpretating the data.
• Also, we believe that a ‘hawkish’ surprise presents the greatest risk to prevailing market positioning, raising the bar for dovish market interpretation of the data.
• More broadly, the recent run of disappointing U.S. labour market and economic activity data leaves the door open to a data-dependent Fed cut in September.
• Fed fund futures price ~20bp of cuts through the Sep FOMC and ~50bp through year end, representing a cut at 2/4 remaining ’24 meetings.
• This seems relatively fair to us at this juncture, so a dovish adjustment to ’25 FOMC pricing may present the most likely avenue for a move lower in yields.
• This could come via a continued moderation in the U.S. economic exceptionalism thesis.
• Zooming out, we caution that the election presents a medium-term source of uncertainty for markets and could limit any moves lower in yields.

Fig. 1: U.S. 2- & 10-Year Tsy Yields (%)