Rate volatility declined in July but remained elevated. The curve twisted around the 2- and 3-year notes; maturities of 1 year and less moved up in yield while intermediate to long maturities declined. The yield on the 10-year started the month at 2.88%, hit a high of 3.08% following the very strong June jobs print, and ended the month at 2.65%.

The FOMC raised the fed funds rate by 75 bps, the third consecutive large rate hike. The Fed indicated the funds rate now stands at “neutral,” a rate which should neither stimulate nor restrict economic growth. Surprisingly, markets ignored the Fed’s focus on its 2% inflation target and began to price in interest rate cuts by the end of 2023, believing the Fed’s aggressive front-loaded hikes would need to be reversed rather quickly in order to avoid a recession.

Economic data during the month displayed conflicting signs on the state of the economy. While employment data continued to exhibit strength, the Q2 negative GDP print of -0.9% led some market participants to believe that the U.S. was either in recession or closely entering one. One key consistent was high inflation, which continued to negatively impact businesses and consumers, and drive the Fed’s messaging and strategy.

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