This week’s upside surprise in inflation is raising the stakes for next week’s FOMC meeting. While the 10-year T-Note yield is still just below its June peak, yields at the shorter-end of the curve are breaking out to the upside. Leading the way is the 1-year Treasury yield, which crossed above 4.0% this week for the first time in 15 years. Even more pronounced is the pace of its ascent. One year ago, the yield on 1-year Treasuries was just 7 basis points (0.07%). That makes for the largest year-over-year change in yields since the early 1980’s. Investors are unaccustomed to yields moving this high and this fast and that is disrupting both financial markets and the economy. Continued upward momentum in yields could leave the macro situation vulnerable to further deterioration and increase downside risks to equities. Stocks do the best in periods of sustained strength and low volatility, neither of which is present at the moment.
