What is going on in bond markets?

A sharp jump in market interest rate expectations has led to a surge in US and EU rates

In this note, in Q&A format, we look at the drivers of the move so far and make an assessment of whether the rise in yields can be sustained

Recent macro data do not justify the move, and inflation expectations have been stable, suggesting the rise in yields is being driven by hawkish central bank guidance

Longer tenors have seen the biggest rises in yields, with the 10y US and German bond yield rising by about 40bp in just two weeks

Indeed, the market has been repricing higher policy rate not only for next year but also well beyond

Based on the Futures curves, the Fed fund and ECB rate are now expected to hold above 4% and 3% respectively

As such, volatility has moved along the yield curve to the longer-end due to the elevated uncertainty regarding the path of monetary policy and the economic outlook

However, we continue to expect rates to start to come down by year-end and throughout 2024, on the back of the economic slowdown and continued disinflation

Underpinning this view is our expectation for a significant rate cut cycle in 2024, with cuts continuing until rates return to more neutral levels

Furthermore, if the jump in yields continues at this pace, we would expect central bank officials begin to verbally push back against the tightening of financial conditions