Traders remain nervous ahead of this week's Federal Open Markets Committee (FOMC) meeting, leading to a decline in US yields, while stocks and oil have also dropped.

The Federal Reserve (Fed) is widely expected to announce plans to quicken the tapering process as inflation continues to soar. Last week's data showed that the US inflation rose +6.8% YoY - right as expected according to the CPI indicator. It was the fastest rate of increase since 1982. In addition, the core CPI jumped 4.9 YoY, meeting expectations, its highest since 1991.

According to The New York Fed's latest survey, the public's short-term expectations for inflation surged to a new record high at 6%. Furthermore, the survey showed that respondents expected prices of everything (from gold to rent and from college to food) to continue accelerating.

It looks like US yields have topped, with the short-term yields coming down from their cycle highs, while the benchmark 10-year US yield topped in March and has failed to post new highs ever since. Furthermore, it declined below the critical 1.5% threshold, suggesting more yield weakness is to come. 

On the other hand, the market has priced an entire rate hike for June 2022, which means the tapering is expected to accelerate from the current pace. Two additional rate hikes are priced in 2022, indicating investors expect the Fed to hike three times next year, with Quantitative Easing (QE) gone as well. 

In that scenario, one would expect yields to move higher. However, short-term yields have surged, but long-term yields declined causing the yield curve to flatten. Investors think that a sharp increases in fed funds will cripple the current economic recovery, leading to rate cuts in 2024 or so. 

Therefore, short-term yields are influenced by the Fed's decision to raise rates, but the market sets long-term yields. And the outlook is not so bright.