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US yields collapsed overnight with the 10Y tenor briefly dipping below 3.60%. There was no obvious single trigger. Yields were falling even before the set of weaker than expected ISM figures were released. Some protection buying might have also come from accounts that are worried about contagion from a stressed European Bank. It could also have boiled down to one-sided positions on rates leading a rally across EGBs and USTs. We had thought yields look lofty and the risk reward point to an adjustment lower in a backdrop where accident risks are high (see here). With financial conditions more stressed than levels seen in June and implied real yields close to 2%, it does not make sense to bet on even higher yields when 10Y yields are close to 4%. The key issue is that financial stability conditions can outweigh economic data when it comes to policy calculus even if the point is not as explicit in the Fed's mandate.
To be sure, there is no guarantee that yields have peaked for this cycle. We went through one iteration from June to July but economic numbers proved too resilient. In the current backdrop where the policy rate is much higher, the market has since pared rate hike bets and are now no longer as convinced about another 75bps hike in November. The pricing of the terminal rate has also fallen closer to 4.50%. If data (especially NFP) proves resilient, yields could pop higher, but perhaps that would present another receive opportunity. Further out, it would require further assessments of market stresses and data. However, it would seem that a Fed pivot would be due in late 2022/early 2023.
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