So much fuss for nothing as US yields erase the downgrade rise

There was so much noise over the weekend and yesterday about the Moody’s downgrade with even some doomsday scenarios. I’ve argued (here) that it was no big deal and just a symbolic thing.

If you look at the US30Y chart now, the market erased the entire rise and we are basically back to where we were before the downgrade. We can now go back to focus on what really matters, which is future Fed policy and inflation expectations.

As I mentioned here,
there’s limited downside at the moment for yields and the path of least
resistance remains to the upside as inflation risk increases. In fact,
as we now price in better and better conditions for growth, the economic
activity will
likely start to accelerate and that could lead to inflationary
pressures.

The Fed is also in a difficult position because rate cuts now
could exacerbate inflation fears and drive long term yields even
higher. That’s what will drive the bond market in the next months.

This article was written by Giuseppe Dellamotta at www.forexlive.com.