Morning Notes — Bond Yields

Ten-year Treasury yields and risk markets (copper/gold ratio, European equity indices, semiconductors and US Financials) tend to have a positive correlation.  That correlation broke down after the 2/24 invasion caused 10-year inflation expectations to overshoot in the face of hawkish Fed rhetoric.  Rational market behavior was restored in the second week of May, bond/equity volatility measures pulled back and longer-dated nominal bond yields have resumed their historical negative correlation with Fed expectations.  Unfortunately, it usually takes several months for heightened volatility measures to mean revert and 10-year nominal Treasury yields are still running ~100bps ahead of levels currently suggested by risk markets. And we expect 10-year Treasury yields to trade below 2.5% in Q4’22/Q1’23.