The yield of 10-year US Treasuries has fallen further over the past month. But we expect it to rise as the Fed tightens policy. Admittedly, during the last major tightening cycle in 2004-2006, it barely rose. But in this case, the increase in the part of the yield which accounts for expectations of future interest rates was offset by a decline in the “term premium”. We are unlikely to see a big drop in the term premium this time around, for the simple reason that it has already fallen by over 150bp this year, and is now at a very low level of not far above zero.
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