Amidst the US Treasury’s plans to auction 2-year notes this week, apprehensions linger over the possibility of yields reaching 5%. The current on-the-run 2s are trading at 4.96%, and recent sales have exhibited lukewarm reception due to substantial auction sizes.
Inflationary concerns persist in the US, with persistently elevated levels over the past three months and escalating commodity prices. However, experts suggest that inflation elsewhere is declining, indicating that it might be more pronounced in the US than globally.
Contributing factors to this US-centric inflation include substantial fiscal deficits, high 30-year fixed mortgages, and the strength of US businesses, particularly multinational tech giants. Nevertheless, peculiar elements such as elevated auto and health insurance rates that are unlikely to persist also play a role. Rent inflation and the specific calculation of owners’-equivalent rent are particularly noteworthy.
As illustrated in the chart from [source], rent increases have plateaued, a trend that has yet to reflect in the CPI. This week’s PCE data, the Fed’s preferred inflation gauge, may reveal a divergence. If this divergence materializes, it could prompt a rapid market adjustment towards rate cuts, potentially depreciating the US dollar and invigorating risk assets.
