Fighting For Survival or Accepting Fate

When salmon return to the river after spending a number of years in the ocean, they don't charge upstream immediately.  They spend time moving in and out of large estuaries, stocking up on calories for the journey ahead and, some would say, acclimating to the harshness of the fresh water after years in the salt.  Some estuaries are so large as to be pit stops for fish that are destined for other streams.  The 4.0% boundary (or let's say 4.02%) is just such an estuary for bonds.  All that remains to be seen is whether these 10yr salmon are just passing by or getting ready to head upstream. 

For traders who believe the Fed's restrictive policies will eventually drive growth and inflation lower, it's hard to make a case for longer-term yields going much above 4%, even with core inflation over 6%.  If you ask traders, the actual outlook for inflation over the next 10 years is close to the Fed's target range.  The orange line on the following chart shows market-based inflation expectations via the spread between TIPS yields and cash 10yr yields (where TIPS = Treasury inflation-protected securities).  In other words, this is the market's bet on average CPI over 10 years.