Morning Notes — Nuanced Fed Pivot

Historical collinearities began to reestablish themselves after 10-year inflation breakeven yields traded below technical support at 280bps (5/9). We discussed the potential for this to happen, thinking the break below 280bps should allow terminal Fed rate expectations to fall from a peak of ~3.50% and allow longer-dated nominal bond yields to move lower as well.  The biggest risk for the recovery has been the potential for a Fed policy mistake as officials attempted to match rising inflation expectations with extremely hawkish rhetoric.  Terminal Fed rate expectations have come off the peak since 5/9, and now appear to be well-anchored below 3.00%.  There has even been a nuanced dovish pivot in Fed rhetoric with Bostic hinting at a possible September pause and Bullard saying “we may cut in 2023” after taking a 75bp hike off the table.