Breaking News
Investing Pro 0
NEW! Get Actionable Insights with InvestingPro+ Try 7 Days Free

Has U.S. Bond Market Fully Priced In Another 75 Bps Rate Hike?

By James PicernoBondsSep 20, 2022 09:06AM ET
www.investing.com/analysis/has-us-bond-market-fully-priced-in-another-75bp-rate-hike-200630067
Has U.S. Bond Market Fully Priced In Another 75 Bps Rate Hike?
By James Picerno   |  Sep 20, 2022 09:06AM ET
Saved. See Saved Items.
This article has already been saved in your Saved Items
 
 
US10Y...
-1.96%
Add to/Remove from Watchlist
Add to Watchlist
Add Position

Position added successfully to:

Please name your holdings portfolio
 

The Federal Reserve is widely expected to lift its target interest rate by 75 basis points tomorrow (Wed., Sep. 21). The question is whether the bond market has priced in the change. That’s a tough call until there’s deeper clarity on where inflation is headed.

There are hints that inflation has peaked, but the evidence is still thin. Even thinner is support for expecting high inflation to ease quickly and substantially in the immediate future.

Meanwhile, the benchmark 10-year US Treasury yield edged higher yesterday (Sep. 19), reaching 3.49% — matching the previous high set in June. For the moment, one can argue the market is on the fence, weighing two competing outlooks. If the crowd senses that the Fed’s policy tightening are still not sufficient to tame inflation, we’ll see the 10-year yield push decisively higher. Investors are also asking: Will tomorrow’s expected rate hike fully convince the market that the central bank is committed to breaking the back of the recent inflation surge?

U.S. 10-Year Treasury Yield Daily Chart
U.S. 10-Year Treasury Yield Daily Chart

If the Fed hikes rate by 75 basis points, that will lift the target rate to a 3.0-to-3.25% range. A market-based estimate of where the terminal rate will be in the near future currently projects a roughly 4.25% objective at some point in early 2023. In turn, that implies there’s another 75-basis-points hike in the cards beyond tomorrow’s increase.

Secured Overnight Financing Rate Forecast
Secured Overnight Financing Rate Forecast

CapitalSpectator.com’s fair-value model currently shows the 10-year yield at 2.90% as of August, based on the average of three models (see details here). That compares with the market’s 10-year rate moderately above that average estimate. On this basis, the model’s implicit forecast is that the 10-year rate’s upside bias is relatively constrained compared with recent history, when the 10-year yield was below the average fair-value estimate.

10-year Treasury Yield/Estimates
10-year Treasury Yield/Estimates

In the short run, changes in the 10-year rate are mostly noise and so our model is of limited use for deciding what’s coming in the days and weeks ahead. Looking further ahead, a key question is how the models’ inputs – economic growth, inflation and other factors – change the fair-value estimate?

Keep in mind that economic growth is slowing and recession risk is rising – trends that imply a lower 10-year yield. To be fair, the outlook for the fourth quarter is unusually cloudy and so it’s hard to get a read on how inflation pressures interact with softer estimates for economic activity. We are, it seems, at a point of maximum uncertainty for modeling such factors.

Bottom line: our fair-value estimate suggests the upside bias for the 10-year rate has moderated lately. That doesn’t mean the 10-year rate can’t rise further from current levels. But without clear signs that inflation will stay elevated, a case is building for expecting that we’re approaching a cyclical top for the 10-year rate before the year is out.

Has U.S. Bond Market Fully Priced In Another 75 Bps Rate Hike?
 

Related Articles

Jesse Felder
Are The Bond Vigilantes Back? By Jesse Felder - Sep 29, 2022

Back in March, I wrote, “The long-term chart of the 30-year treasury yield may now be the most important chart in the world. For the past 30 years or so, the yield on the...

Has U.S. Bond Market Fully Priced In Another 75 Bps Rate Hike?

Add a Comment

Comment Guidelines

We encourage you to use comments to engage with other users, share your perspective and ask questions of authors and each other. However, in order to maintain the high level of discourse we’ve all come to value and expect, please keep the following criteria in mind:  

  •            Enrich the conversation, don’t trash it.

  •           Stay focused and on track. Only post material that’s relevant to the topic being discussed. 

  •           Be respectful. Even negative opinions can be framed positively and diplomatically. Avoid profanity, slander or personal attacks directed at an author or another user. Racism, sexism and other forms of discrimination will not be tolerated.

  • Use standard writing style. Include punctuation and upper and lower cases. Comments that are written in all caps and contain excessive use of symbols will be removed.
  • NOTE: Spam and/or promotional messages and comments containing links will be removed. Phone numbers, email addresses, links to personal or business websites, Skype/Telegram/WhatsApp etc. addresses (including links to groups) will also be removed; self-promotional material or business-related solicitations or PR (ie, contact me for signals/advice etc.), and/or any other comment that contains personal contact specifcs or advertising will be removed as well. In addition, any of the above-mentioned violations may result in suspension of your account.
  • Doxxing. We do not allow any sharing of private or personal contact or other information about any individual or organization. This will result in immediate suspension of the commentor and his or her account.
  • Don’t monopolize the conversation. We appreciate passion and conviction, but we also strongly believe in giving everyone a chance to air their point of view. Therefore, in addition to civil interaction, we expect commenters to offer their opinions succinctly and thoughtfully, but not so repeatedly that others are annoyed or offended. If we receive complaints about individuals who take over a thread or forum, we reserve the right to ban them from the site, without recourse.
  • Only English comments will be allowed.

Perpetrators of spam or abuse will be deleted from the site and prohibited from future registration at Investing.com’s discretion.

Write your thoughts here
 
Are you sure you want to delete this chart?
 
Post
Post also to:
 
Replace the attached chart with a new chart ?
1000
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Thanks for your comment. Please note that all comments are pending until approved by our moderators. It may therefore take some time before it appears on our website.
 
Are you sure you want to delete this chart?
 
Post
 
Replace the attached chart with a new chart ?
1000
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Add Chart to Comment
Confirm Block

Are you sure you want to block %USER_NAME%?

By doing so, you and %USER_NAME% will not be able to see any of each other's Investing.com's posts.

%USER_NAME% was successfully added to your Block List

Since you’ve just unblocked this person, you must wait 48 hours before renewing the block.

Report this comment

I feel that this comment is:

Comment flagged

Thank You!

Your report has been sent to our moderators for review
Continue with Google
or
Sign up with Email