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High Yields & New Conflict - Awaits Fed

It has been more than a month since the last FOMC meeting took place. Since then bond yields have risen to new recent highs with 10-year Bond yield rising from 4.16% to 4.88%. Within the same period world is going through a new conflict between Israel and Hamas that can spill further.

These actions have resulted in the Fed Swap market reacting more dovish as it estimates no rate hike till May 2024 and the first rate cut in June 2024. Whether these estimates hold or change, post tomorrow's meeting will be important to see.

Though the financial conditions continue to be tight the consumer spending for now remains stronger than estimates the slowdown is yet to officially begin. But there are signs of stress as student repayments have started resulting in the highest default in rate on credit cards as priority changes.

The main worry that the Fed might want to give time would be ok inflation front. The conflict is still taking shape and the actual impact of it especially in oil is still unknown. World Bank has already issued a crude oil price warning yesterday due to the conflict.

The Fed might have some room to give a breather till this year's end and would likely depend on next year's start for deciding the road ahead. This might help yields cool off and markets rally till year-end but as the uncertainty remains high the volatility would remain high as well.


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