Here’s What You Need to Know RE: Fed-Treasury Accord 2.0
The host argues that the recent rise in Treasury yields is driven mainly by higher real rates and a higher neutral rate, not by rising inflation expectations, and says the Fed may need to hike before easing. He expects a Fed-Treasury Accord 2.0 could eventually use Treasury buybacks or other yield caps to restrain long-term rates and create room for lower short-term rates.
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Read the Full SummaryKey Points
The host says 121 basis points of the 131-basis-point rise in the 10-year Treasury yield since the end of February came from real rates, while inflation expectations contributed only 10 basis points.
The host attributes the increase in neutral rates partly to competition for capital and estimates that U.S. R-star has risen roughly 125 basis points since February, according to his firm's model.
The host argues the Fed must continue hiking if it wants to avoid the risk of sticky inflation, while noting that U.S. money markets are pricing in three hikes over the next 12 months.
Real Rates And R-Star
The host attributes the Treasury yield rise primarily to higher real rates and a rising neutral rate, arguing that greater competition for capital—not inflation expectations—is driving the move.
Fed Hikes And Inflation
The host argues the Fed may need to keep hiking because policy is accommodative relative to estimated neutral, while inflation remains sticky and could rebound toward its equilibrium rate.
Treasury Yield Caps
The host expects the Fed to hike before cutting and says Treasury yield caps, potentially implemented through buybacks, could create room to lower short-term rates.
Fed-Treasury Accord 2.0
The host forecasts closer Fed-Treasury coordination, with TGA-funded Treasury buybacks potentially supporting moderate long-term rates under the Fed’s statutory mandate.
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