Eleven years ago, Alan Greenspan described the behaviour of bond markets as a “conundrum” in testimony to the Senate. This was because long-term yields had trended lower, even as the US FOMC had raised the federal funds rate by 150bp. If that was a conundrum, their behaviour since the Committee hiked rates last December is even more puzzling. After all, the 10-year Treasury yield has plunged by more than it did in the first two months of the last tightening cycle that began in June 2004. Our forecast is that the yield will rebound to 2.5% by the end of this year, from around 1.75% now.
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