Eventually fixed income traders will wish to be compensated for the growing risk in the real economy, pushing yields higher. Dovish forecasts from the Fed will carry less weight with this investor cohort as economic reality sets in.
Fed balance sheet reduction = higher yields. Investors would be wise to remember that the Fed is in the process of unwinding its balance sheet (scheduled to reach a $95 billion run rate by September), which means that as Treasuries roll off, yields will move higher.
Perma-dove Treasury Secretary Yellen admits high inflation is here for the duration of 2022 (see video below). Yellen provided Fed Chair Powell ammunition to raise the Fed Funds Rate aggressively in the near-term.
We expect a 100 basis point Fed Funds Rate increase during the July FOMC meeting. The 2 year Treasury yield could very well increase to a level between 3.50% and 4.00% when the next hot CPI print comes in on July 13th. The Fed needs to get more aggressive regarding rate moves, otherwise it is treading water at best.