Rate volatility picked up following a surprisingly strong July employment report and was further supported by Fed speakers working to move market participants from a “dovish pivot” toward a “higher for longer” theme for federal funds. Chair Powell’s short speech at Jackson Hole reinforced the committee’s commitment to squash inflation with expectations of a sustained period of higher overnight rates.

Monthly total returns were negative, driven by the durations. During August, most rates rose by ~50-60 basis points (bps), with the exceptions being 6-month bills (+44 bps) and the 30-year bond (+31 bps). In response to the Fed’s call for a sustained higher rate, 3- to 5-year yields made the biggest readjustments.

Most economic data continue to support a low, but positive real growth and stable to moderating nominal growth near term with softening expectations in the future. While financial conditions eased considerably during late July and early August, Jackson Hole was a catalyst for a reversal. The market is pricing in an additional 125-150 bps of overnight rates by year end reaching peak fed funds the first or second quarter of 2023. With terminal rates expected in the 3.5-4.0% range, locking in 3.5% today for two years brings the short end back near the attractive year-to-date highs.

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