This is not the beginning of a bond bull market
This week, a bull steepening of the US yield curve is likely as the Federal Reserve is expected to hike rates for the last time, ending the most aggressive interest rate hiking cycle in forty years.
However, it may be premature for a bond bull market to begin.
Despite recent encouraging inflation data, it’s important to remember that economists are forecasting core PCE to end the year at 4.2% and to end 2024 at 2.7%, well above the Fed’s inflation target. Therefore, without a recession on the horizon and another year and a half above-target inflation, there is little chance for the Fed to turn dovish anytime soon, limiting the bull steepening trend and the drop in yields.
What follows is a “passive tightening” of monetary policies. The concept is that as interest rates are kept higher for longer, they will contribute to a gradual and constant correction of price pressures.
In the meantime, an increase in coupon supply and a passive quantitative tightening (QT) are likely to keep yields high, too. The Treasury will release its refunding announcement on August the 2nd, and it can weigh on US Treasuries’ performance.
FOMC meeting and PCE deflator to contribute to a bull steepening of the yield curve
Friday's PCE deflator might have a bigger impact than Wednesday's FOMC meeting. The monthly PCE core deflator is expected at 0.2%, showing that tighter monetary policies are working against inflation.
Two-year yields are likely to find strong support at 4.58%. If they break below this level, they might drop to 4.25%. However, a major change in sentiment must occur to take yields that low as they remain bullish with a gold cross forming.
 Source: Bloomberg economic forecasts.