Bond yields

There’s really no doubt that the market deeply believes the Fed can get inflation under control. That it’s not the 80s (unanchored expectations), energy pass-throughs, or some curious combination of Morning in America.

Otherwise, bond yields would be well above 6-7%.

It also explains why many DAA managers got the fixed income call wrong. That pink line below is your “slide rule”, and thinking that CPI would top out at 3 or 4 meant you didn’t sit 10-20 pp underweight fixed income.

Restated, DAA managers, like us, correctly determined that bond yields would not price in, in perpetuity, the high actual inflation outcomes and that the slope of the pink line was the one to be thinking about.

However, how far along the pink line you went was a function of where you thought CPI would be by now.

We thought we’d top out much closer to 3-4% for a while and then slowly trend back towards target (anywhere between 2-2.5%). But month after month of 4, 5 or 6% for core inflation clearly required a higher nominal yield for 10 year bonds.

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