“The latest economic data have come in stronger than expected, which suggests that the ultimate level of interest rates is likely to be higher than previously anticipated,” Powell told the Senate Banking Committee. “If the totality of the data were to indicate that faster tightening is warranted, we would be prepared to increase the pace of rate hikes.” 

Eoin Treacy's view

That does not sound like someone who is about to stop raising rates. Of course central bankers rarely sound like they are about to change tack until they do. A lot will depend on incoming data.

2-year yields tested 5% today and remain in a consistent uptrend. That suggests the bond market still believes the peak in rates is somewhat higher than present values.

A year ago, the prospect of positive real rates was almost laughable. Following one of the fastest hiking cycles in the history, that is now the reality. CPI is at 6.4% and PCE is 4.7%. Meanwhile the Fed’s constant maturity 10-year Real Yield is at 1.53%.

The cost of rolling over maturing debt is problematic for any issuer in that position. That is most particularly relevant for governments with short average durations like the USA. More than anything that makes the argument for putting a lid on inflation now rather than waiting for it to get out of control.

The corporates sector on the other hand used the rock bottom rates of the pandemic to stretch maturities. In between the commercial real estate sector is contending with lower occupancy levels in several large cities as well as higher rates. That’s why the number of defaulting property investments is rising.

Blackstone, for example, remains in a downtrend.