The bond market is seeing rising yields, with the 10-year (^TNX) yield hitting 4.3%, partly due to a better-than-expected CPI print suggesting a slight deceleration in inflation.
Tom Porcelli, PGIM Fixed Income chief US economist, joins Morning Brief hosts Brad Smith and Madison Mills to discuss the bond market's (^TYX, ^TNX, ^FVX) reaction to inflation data and recession concerns, and what this signals for the Federal Reserve's future actions. He explains that while the recent CPI report doesn't reflect tariffs, it is PCE that is driving yields higher.
To watch more expert insights and analysis on the latest market action, check out more Morning Brief here.
What is the bond market telling you today? What are we expecting in terms of the Federal Reserve and what does that tell us about the market as well?
Yes, so good to be with you as always, also. Uh, yeah, you know, when I look at the market, I I think the market is, um, sort of conflicted here a little bit, right? It's, you have to consider two important things from this CPI report that just came out a little while ago. One, um, yeah, it was better than expected, but, um, this doesn't reflect tariffs, right? This doesn't this this this is reflection of what of what was. It's not a reflection of what is to come. Right. Uh, and and so I think that that's, you know, sort of tempering the the the markets reaction, which is why yields are up. I think the other thing you need to keep in mind too is that when it comes to CPI, um, really what we need are sort of the the the components within CPI that feed into PCE. Um, and so when we look at those components that feed into PCE, it looks like PCE could actually be pretty firm. Um, you know, we're looking at about three tenths right now. We'll firm that up after we get PPI tomorrow. So, I
think both of those factors, um, the reality of this report does not reflect tariffs, um, and it looks like PCE is going to be a little firm is what's driving yields higher. So what end of duration, just to kind of get that question out of the way. What end of duration should investors feel comfortable with at this juncture?
Um, well when you say end of duration, you mean like sort of where across the curve do should people feel comfortable? Certainly.
Yeah. So, you know, look, I I would say it this way. Um, if I look at, um, so if I look at like twos and tens, I think, you know, two is as always are going to be at the mercy of what's going to happen from a monetary policy perspective. Our view is that you're you're likely going to see cuts this year. I mean, we've had two cuts built in, um, for this year since since the beginning of year, actually since late last year. Uh, and that's something we still expect. I think tenure yields will probably be a bit more anchored. Um, but but that, but again, I just want to be clear on this point. That assumes that we actually don't see the worst of tariffs. Um, at the end of the day, you know, wherever you're going to be across the curve is going to be, uh, you know, at the mercy of what degree of tariffs do we see? Because I can make an argument if we do see some pretty aggressive tariffs that I actually think that would usher in a more aggressive easing cycle for the Fed. Everyone's talking about this impact on inflation and I have a ton of sympathy for it. I mean, I think it will show up in inflation at first. But I think ultimately this will actually wind up, um, biting growth. Um, and so I can make an argument, um, for the Fed to ease even more, in which case, um, that's not priced into the market.