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Bill Diviney, an analyst at ABN AMRO, explained that the 10y Treasury yield broke out to the highest level in more than a month today at 2.95%.  

Key Quotes:

“Although the trigger appears to have been the overnight jump in JGB yields, it likely also reflects a more sanguine view of the macro implications of trade policy uncertainty.”

“Indeed, while the risks around the President’s policies are as high as they have ever been, business confidence has held up remarkably well so far.”

“Although we see an elevated risk that trade policy dampens confidence and in turn investment, our base case remains that the macro implications will be limited, and that the Fed will continue hiking at a quarterly pace until next June.”

“The market seems to be coming around to this view – a September hike is now almost fully (92%) priced by OIS forwards, up from c.80% earlier in the month.”

“Further out, the conviction level in additional rate hikes becomes weaker, however; pricing for a December hike is at 68%, next March at 56%, and next June at 52%.”

“All told, 66bp of the 100bp in tightening we project to next June is now priced in. Although there is clearly scope for the market to price in rate hikes with greater conviction at some point, expectations will likely remain subdued until uncertainty over trade policy recedes. “