Morning Notes — Lower Inflation Expectations

Inflation expectations continue to decline with 10-year breakeven yields down to our predetermined support range of 262-265bps. The sustained break below 275bps (started Monday) should reinstate normal cross market collinearity between commodity prices, the manufacturing cycle, Fed rate expectations and nominal bond yields that broke down in the wake of the 2/24 invasion. That event caused an inflation panic with retail investors crowding into a relatively illiquid TIPS market.  If we’re right, current Fed rate expectations (50bp in June and 50bp in July) will now lead to lower long date yields, and the return to normalcy should lead to lower bond market volatility with lower stock market volatility following close behind.