background image background image background image

The recent selloff shows that markets are not ready for tighter monetary policies

Picture of Althea Spinozzi
Althea Spinozzi

Head of Fixed Income Strategy

Summary:  The recent selloff in US Treasuries points to changing monetary policies' expectations. The less transitory inflation is, the more aggressive central banks will need to turn, and the selloff in the bond market will continue. That's why this Friday's PCE figures remain in the spotlight.

On a calmer day for financial markets, it’s useful to take a step back to better understand what are the trends that are driving risk sentiment in the bond market. I can currently point to four main drivers of US Treasuries:

  1. Supply and demand
  2. Debt ceiling dilemma
  3. Inflation expectations
  4. Monetary policies’ expectations

The above can be used as a compass when analyzing the recent selloff in US Treasuries and it shows that the fast rise in yields can be attributed only by a shift in monetary policy expectations.

Supply and demand

This week the US Treasury sold 2-year, 5-year and 7-year notes and despite demand was slightly lower compared to summer, it was good enough not to spill volatility in the secondary market. Bidding metrics deteriorated considerably only for the 2-year notes, which might be linked to the debt ceiling dilemma. However, demand for the belly of the curve remained decent leading us to believe that the bear steepening of the yield curve has not been caused by supply-demand discrepancies

Debt ceiling dilemma

Discussions concerning the debt ceiling issues are taking a central stage as Janet Yellen said that the US might default on its debt already by the 18th of October, a date eerily close. However, the reaction to that news should be a bear flattening of the yield curve, not a bear steepening led by the belly of the curve as we have seen in the past few days. Indeed, a default would provoke short-term rates higher, while the long part of the yield curve, 10-year yields in particular, will drop serving as a safe-haven exactly as they did during previous Debt ceiling crisis.

Therefore, only the lack of demand for the 2-year note auction can be reconducted to the debt ceiling crisis, while the selloff throughout longer maturities cannot be linked to this topic.

Source: Bloomberg and Saxo Bank.

Inflation expectations

Looking at breakeven rates, we can safely say that market’s inflation expectations didn’t advance since summer. Thus, breakevens are not driving the fast rise in yields. It’s key to recognize because it implies an acceleration in real yield, which poses a threat to risky assets.

Source: Bloomberg and Saxo Group.

Monetary policies’ expectations

We can confidently say that the recent move higher in nominal and real yields has been caused by changing monetary policies’ expectations. Indeed, the Eurodollar strip is pricing two rate hikes by the end of 2022. While in 2021, the market expects already a rate hike of 15bps. That’s a massive change from a few weeks ago, when the market was biting into the Fed’s Average Inflation Targeting (AIT) framework and rate hikes to begin in 2023 despite rising signs of more permanent inflation. It shows that last week’s central banks’ meetings printed the idea in markets that monetary policies are just about to turn more hawkish than what the market expects.

A big question however remains: will rates continue to rise? Our short answer to that question is yes. However it depends on how inflation turn out to be more less transitory. That’s why despite the market is calming down at the moment, the PCE figures and University of Michigan survey coming out of the US are pivotal for the bond market. The less transitory inflation is, the more aggressive central banks will need to be, and the selloff in the bond market will continue.

Quarterly Outlook 2024 Q3

Sandcastle economics

01 / 05

  • 350x200 peter

    Macro: Sandcastle economics

    Invest wisely in Q3 2024: Discover SaxoStrats' insights on navigating a stable yet fragile global economy.

    Read article
  • 350x200 althea

    Bonds: What to do until inflation stabilises

    Discover strategies for managing bonds as US and European yields remain rangebound due to uncertain inflation and evolving monetary policies.

    Read article
  • 350x200 peter

    Equities: Are we blowing bubbles again

    Explore key trends and opportunities in European equities and electrification theme as market dynamics echo 2021's rally.

    Read article
  • 350x200 charu (1)

    FX: Risk-on currencies to surge against havens

    Explore the outlook for USD, AUD, NZD, and EM carry trades as risk-on currencies are set to outperform in Q3 2024.

    Read article
  • 350x200 ole

    Commodities: Energy and grains in focus as metals pause

    Energy and grains to shine as metals pause. Discover key trends and market drivers for commodities in Q3 2024.

    Read article


The Saxo Bank Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website. This content is not intended to and does not change or expand on the execution-only service. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.

Please read our disclaimers:
Notification on Non-Independent Investment Research (
Full disclaimer (
Full disclaimer (

Saxo Bank A/S (Headquarters)
Philip Heymans Alle 15

Contact Saxo

Select region


Trade responsibly
All trading carries risk. Read more. To help you understand the risks involved we have put together a series of Key Information Documents (KIDs) highlighting the risks and rewards related to each product. Read more

This website can be accessed worldwide however the information on the website is related to Saxo Bank A/S and is not specific to any entity of Saxo Bank Group. All clients will directly engage with Saxo Bank A/S and all client agreements will be entered into with Saxo Bank A/S and thus governed by Danish Law.

Apple and the Apple logo are trademarks of Apple Inc, registered in the US and other countries and regions. App Store is a service mark of Apple Inc. Google Play and the Google Play logo are trademarks of Google LLC.