August Sees Shift in Yield Curves as Fed Communication Reinforces Tightening Expectations

The month of August saw a divergence in developed-market yield curves, rather than a broad directional move in rates. Short-dated yields rose as investors reassessed the likelihood that the policy cycle could shift back toward tightening, while long-dated yields remained stable or lower, resulting in flatter curves across most major markets.

Spread sectors were firm but increasingly dispersed: high yield and emerging market debt tightened materially, while investment grade was largely unchanged. Volatility declined across both rates and equities.

In the US, the 10-year Treasury yield rose 1.5 basis points to 4.75%, while the 2-year yield increased by 5 basis points and the 30-year declined by 3 basis points, flattening both the 2s10s and 5s30s curves.

Federal Reserve communication was a central policy event of the month, with Chair Warsh reaffirming the Fed's 2% personal consumption expenditures inflation target in his Jackson Hole address. He emphasized the need for further progress on underlying inflation, which moved September hike expectations back above one-half.