10 year Treasury rates peaked at the end of March at 1.74% after having risen from low of just 0.56% back in the summer of 2020. Now, the rate stands at 1.57% even as economic data continues to come in smoking hot and policy remains incredibly accommodative. In times like this, we have to ask ourselves whether this is a correction within a longer-term uptrend in rates or if we’re currently witnessing peak rates for the cycle. The question is of vital importance to asset allocators of all stripes since a falling/rising rate environment informs equity factor performance ranging from growth/value to small/large to domestic/foreign. Our read of the data suggests we may yet have more to go on the downside for rates, but that this is a correction within a longer-term uptrend.

Why could rates still fall from here even though consumer prices are soaring, housing is ripping, employment is improving, etc.? It really comes down to expectations. The Fed is telling us they will continue buying bonds for the foreseeable future and that they will not raise rates through 2023. But the bond market, through February and May, was acting like the Fed would not make good on that promise. We know this by observing market expectations for the Fed Funds rate in December 2023. In early April the market had fully priced two rate increases, or 50bps of total rate hikes, by December 2023 (100-99.5=.5).

Similarly, the eurodollar market – which is a close cousin to the Fed Funds market – was pricing more than four rate increases, or 120bps of total rate hikes (100-98.8=1.2).