There is more room to the downside for market rates, but we will go up first
Given all of this, we anticipate that the US 10yr Treasury yield can get back above 4%, back to where it was before the SVB story changed the dynamic. The 10yr could well take out the previous high, and remain elevated for a time. With European central banks tending to show urgency on the inflation issue, there is ample room for eurozone market rates to rise too. The 10yr Bund yield is quite likely to break back above 2.5%, and then trend towards 3%. The cycle high seen when SVB went down was 2.75% – that’s liable to be taken out.
We think these are moves that should be faded through, as increasingly we expect the residual oomph factor to be outweighed by an increasing angst factor. Growing unease with respect to the commercial real estate loan portfolios being held by banks will also begin to count. And further falls in inflation should be a natural outcome as demand slows. Once key core inflation readings have moved below 3%, the way will be clear for the Fed to consider rate cuts. A 2% handle is all that’s needed (so, for example, 2.9% will be good enough). The ECB won’t be too far behind. So sure, anticipate further rises in market rates now, but prepare for much bigger falls ahead.
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