February core PCE printed 3.0% YoY with a 0.37-0.38% MoM run rate — a pace that annualizes well above the Fed's 2% target and confirms the inflation stall thesis. With the 10-year yield at 4.35%, the 2-year at 3.84%, and tomorrow's FOMC a near-certain hold, the structural case against long duration remains intact. TLT at $86.37 is up 0.35% YTD, a sign the market has already partially repriced — but the real test comes from March PCE and whether Powell's likely final press conference introduces upgraded inflation language.
The February PCE data that landed ahead of this week's FOMC meeting is more damaging than the headline 2.8% YoY number suggests. Core PCE came in at 3.0% YoY and 0.37% MoM — that monthly run rate, if sustained, puts the Fed nowhere near its 2% mandate for at least another 18 months under any plausible scenario. Services inflation accelerated to 3.0% annually in February from 2.6% in January, and the personal savings rate dropped to 4.0% from 4.5% the prior month, which means consumers are still spending despite purchasing power erosion. There is no disinflation momentum here. There is stagnation at an uncomfortable level.
The yield curve is quietly repricing this reality. The 10-year is at 4.35% today, the 2-year has risen eight of the past ten trading days to 3.84%, and the spread between them sits near 53 basis points — a curve that has steepened modestly but remains historically compressed relative to the distance between the Fed's current target of 3.50-3.75% and where inflation actually is. The 2-year being off its 52-week high of 4.052% by roughly 21 basis points tells you markets still have residual easing expectations priced in. That repricing risk is asymmetric to the upside in yields if March PCE — not yet released — comes in hot.
Reuters flagged this week that the 10-year yield's trading range has compressed to historic lows, a technical coiling pattern that typically precedes a breakout. With FOMC on Wednesday, PCE March data imminent, and Iran peace talks stalling (providing a bid to oil that feeds directly into goods and energy PCE components), the catalysts for an upside yield break are stacking. TLT at $86.37 is up just 0.35% YTD — a near-zero real return in nominal terms — and the path of least resistance for long duration remains lower price, higher yield. I am not chasing TLT here.
The TIPS data in the verified feed shows anomalous figures I will not use, but the conceptual signal is clear: real yields matter more than nominal yields in a regime where inflation is sticky above 3% core. If the Fed holds at 3.50-3.75% and core PCE stays near 3%, real short-term rates are barely positive. That is not a restrictive policy stance in any meaningful historical sense. The Fed is not fighting inflation — it is coexisting with it while hoping for a supply-side resolution that geopolitics are actively undermining.
Powell's press conference tomorrow is the immediate asymmetric event. If the statement language upgrades inflation characterization or introduces explicit upside risk language, the front end reprices sharply and TLT tests lower levels. If Powell maintains the current soft-pedal tone, the market exhales briefly but the PCE data is already in the pipe. Either way, selling duration into strength remains the correct posture. The Transamerica and Schwab year-end targets of 3.00-3.25% on Fed funds look increasingly detached from a reality where core PCE is printing 0.37-0.38% per month and services inflation is re-accelerating.