"Higher for Longer" interest rate
Another factor was the "higher for longer" interest rate guidance by the Fed that normalised term premiums (10Y UST less Fed Funds Rate).
Term premiums should be positive, serving to compensate the risk and volatility in locking in your interest rates for a longer period.
The term premium has been negative (or inverting) for the past 10 months against its long-term average of around 100 bps.
Finally, real interest rates (Fed funds rate less core PCE) have started to steepen.
Central banks' tolerance for higher real interest may be due to the stickiness of recent inflation data despite their aggressive rate hikes.
Long-term real rates are around 150bps. Assuming the Fed hits its inflation goal of 2%, the fair value of 10Y UST is 4.5% (2% plus 150bps plus 100 bps).
We do find bonds attractive as we expect Fed to pause following Powell's recent comments that financial conditions have clearly tightened.
In addition, we think the growth in fiscal deficits will taper down from reduced social security payments and delayed tax collections from California.
US growth will also be dragged down by student debt repayment, higher interest rates and falling excess savings from the pandemic stimulus.
Source: Phillips