Treasuries vulnerable even if inflation worries ease

More than half of the 80bp rise in the 10-year Treasury yield since last September, to around 3.0% now, can be attributed to inflation compensation. The rest has been guided by a belief that the Fed will tighten policy more aggressively in real terms. Although we expect inflation compensation to drop back with the price of oil, we forecast that yield will climb further as the central bank steps harder on the brakes in order to prevent underlying inflation from picking up further.