May 18, 2021
The next catalyst for bond yields will be the release of US and Eurozone flash May PMIs this Friday. The number will be an important input for bond yields and equity sector performance, but better than expected PMI probably won’t be enough to lift US 10-year yields through resistance at ~1.69%. The next legitimate catalyst for bond yields will likely be US April PCE (Fed’s favorite inflation measure) on Friday 5/28 and/or the US June Jobs Report on Friday 6/4. Labor markets should tighten rapidly in coming months, which will open a discussion on tapering and keep bond yields biased higher from current levels. Look for 10-year yields to rise to the 1.90%-1.98% range this summer after a brief pause at ~1.79%.
The Fed has clearly made inflation a policy objective. In the past, the Fed has preferred to tighten preemptively and slowly. With the objective now changed, we should expect any tightening cycle to be faster and potentially more disruptive for markets.